U.S. no longer a leader of fiscal rescue

The U.S. has stayed uncharacteristically distant as European nations struggle with their long-running debt crisis, creating an opening for big emerging nations such as China and Brazil to move to center stage in world economic affairs.

U.S. leaders have steadfastly refused to contribute any funding to help debt-strapped European countries such as Greece and Italy, citing massive and unresolved debt problems of their own. But Brazil, Russia and a few other emerging nations that are flush with cash are offering a helping hand.

Analysts expect China — which has more than $3 trillion of foreign exchange reserves and is uniquely positioned to come to the rescue of its biggest export market — to eventually provide critical funding.

The price of such assistance is likely to be, however, greater power and influence for such developing nations within the Group of 20 and the International Monetary Fund, where the U.S. traditionally has been the leader.

While the U.S. stance against intervening in the European crisis is not illogical — and is welcome even in Europe where political leaders want to decide things for themselves — it is notable in that it is the first time since the U.S. emerged as the world’s largest economy after World War II that it has failed to take a leading role in resolving a major financial crisis.

“The world has changed. The U.S. is no longer central” to efforts to deal with every economic crisis, said David Gordon, a director at the Eurasia Group. He noted that the U.S. in the past has organized coalitions to contend with hot spots such as the Latin American banking crisis in the 1980s and the Asian financial crisis in the 1990s, while putting “a lot of resources into play.”

Today, “the U.S. is not part of the solution,” he said. Rather, the spotlight has been on the two biggest economies in Europe and their leaders, German Chancellor Angela Merkel and French President Nicolas Sarkozy.

President Obama, who adopted a “leading from behind” stance in the Libyan civil war and other situations, occasionally puts in an encouraging word. But U.S. leaders mostly have been sitting on the sidelines, urging action and sometimes criticizing their peers in Europe for not moving fast enough or aggressively enough to stem the financial hemorrhaging in the global stock and debt markets.

European leaders have pointedly rejected U.S. criticism that they are not moving rapidly enough to contain the crisis, insisting that they must take their time to forge a lasting solution for the complex grouping of 17 nations that make up the European Monetary Union.

“This process won’t last weeks. It won’t last months. It will last years,” Mrs. Merkel said in a Wednesday speech to the German Bundestag, which elicited groans in the backrooms of Washington.

Beyond the obvious differences between the U.S. and Europe over how to handle the crisis, Mr. Gordon attributed the disengagement in the U.S. to political and financial constraints in a nation where voters overwhelmingly oppose providing financial aid to other nations, especially those perceived as having enough money of their own.

It is not because the crisis in Europe is unimportant, he said. In fact, the White House and Federal Reserve have acknowledged that any unraveling of the crisis on the other side of the Atlantic could create a financial tsunami that would derail the tepid U.S. economic recovery in coming months.

Mr. Obama likely knows how important containment of the crisis is to his own re-election, Mr. Gordon said, but he has nevertheless kept largely silent on how to resolve the situation.

Treasury Secretary Timothy F. Geithner has engaged in shuttle diplomacy, meeting with European leaders in private and urging action, while cheering and offering suggestions from the sidelines. Even Federal Reserve Chairman Ben S. Bernanke, who analysts say doubtlessly loses sleep from time to time over the potentially cataclysmic effect the crisis could have on the Western world’s banking system, has played a mostly subordinate role.

Mr. Bernanke described the U.S. at one point as an “innocent bystander” being buffeted by the financial and economic fallout from the crisis like everyone else.

The U.S. has an outstanding $100 billion line of credit for the IMF to use to help alleviate the crisis — an emergency provision enacted in 2010 to deal with ripple effects from the 2008 U.S. financial crisis.

With a growing number of conservative Republicans opposed to even that amount of engagement, administration officials have made it clear they will not go beyond their current IMF contribution to help long-standing allies in Europe.

By contrast, Russia this week offered to give the IMF at least $10 billion to help fight the crisis. Brazil and Mexico last week offered to increase their IMF contributions.

Europe is a leading export market for products from these developing nations, and the Latin American nations have especially deep ties with Spain, one of the most debt-strapped countries in Europe.

Mexican central bank chief Agustin Carstens told IMF chief Christine Lagarde that Mexico, which will hold the Group of 20’s chairman post next year, views efforts to help resolve the European crisis as “one of the major tasks” it intends to tackle.

Brazilian President Dilma Rousseff told Mrs. Lagarde that Brazil wants to contribute some of its cash reserves to the IMF for use in Europe, and it will organize greater contributions from other large emerging economies such as China. She said Brazil expects to gain greater voting power within the IMF in return.

Mrs. Lagarde said a greater role for Brazil was “welcome.”

“As the balance of economic power shifts, emerging economies are a key part of the solution to the global problems. Brazil consistently presents an important voice to the world on behalf of the interests of emerging and developing economies. This is a critical role,” she said.

Increasing the power of Brazil, China, Russia and other emerging nations will “make the IMF more representative of the global reality,” she added. The increased voting shares for emerging nations likely would be shifted from small European countries that are now overrepresented on the IMF’s board.

The specter of the IMF touring Latin America with cup in hand “shows a remarkable shifting of power in the international scenario” away from the U.S. and toward the major emerging countries, said Gustavo Palhares, an analyst with the Council on Hemispheric Affairs.

“For many years, Brazil was a constant borrower of the IMF, but this time the country has been formally requested to lend funds to the IMF.”

China has not been so open in seeking a leading role resolving the crisis, although it is acknowledged to hold the trump card because of its unsurpassed reserves. While China’s leaders have offered vocal support for Europe, they have declined to provide emergency assistance.

Chinese officials, concerned about the appearance of bailing out wealthy European countries while millions of Chinese citizens remain dirt poor, say privately that they are compelled to manage their investment funds in a way that makes money and avoids too much risk.

They say they are waiting for a turning point in the crisis when they can be sure that any investment in Europe will be profitable as well as productive in ending the crisis.

Some observers say the U.S. is ceding power to other countries by remaining aloof and in fact may be prolonging the crisis.

“President Obama has said that Europe has enough money to help itself. But the numbers don’t add up,” said Thomas Kleine-Brockhoff, director of the German Marshall Fund’s EuroFuture Project.

He estimates that Spain and Italy’s borrowing needs will amount to $2 trillion over the next three years should they lose access to credit markets — far more than Europe or the IMF have available to lend without help from the U.S.

“No longer do the Americans have the choice whether or not to spend U.S. taxpayer money to address the European crisis,” he said. “The question is rather whether they would like to pay for the crisis by way of increasing the IMF’s firepower or by way of the global recession/depression that a collapse of the euro would inevitably cause.”