Posen Says Lew’s Challenges Include Global Austerity

Jack Lew will need to deal with foreign countries’ currency manipulation and the global effects of countries cutting their budgets if he becomes the next Treasury secretary, said Adam Posen, president of the Peterson Institute for International Economics.

President Barack Obama plans to name Lew, currently White House chief of staff, tomorrow as his choice to replace Timothy F. Geithner, a person familiar with the process said.

“The first thing Jack Lew’s going to have to face is that there is an international side,” Posen told reporters at a lunch at the Peterson headquarters in Washington today. “He’s not going to be able to ignore it.”

Posen said austerity effects on the global economy and currency manipulation are the top two international issues for the new Treasury secretary.

Lew has spent much of his career working in government in Washington, both on Capitol Hill and in the executive branch. He previously served as Obama’s budget director.

While Lew is “enormously qualified” on the domestic budget side, he is “obviously someone who’s never worked on the international side,” said Posen, a former Bank of England policy maker.

‘Significantly Undervalued’

The U.S. Treasury last year declined to label China a currency manipulator under U.S. law while saying the yuan remains “significantly undervalued.” The Treasury said in a Nov. 27 report that “reserve accumulation, an indicator of the degree of Chinese intervention in the currency market, has slowed markedly.”

Switzerland overtook China as the world’s leader of foreign exchange-rate management in 2012 as the country fought to curb the appreciation of the franc, which was boosted by demand from investors seeking alternatives to the European Union’s troubled assets, according to data compiled by Bloomberg.

Speaking about the relationship between the spending cuts pursued by national governments and the global economic growth, Posen mentioned the International Monetary Fund, which in October published a study of austerity measures in 28 economies from Italy to Japan. The study found forecasters systematically underestimated the role of national governments’ spending cuts in lowering global economic output.

“The international spillovers when everybody tightens up in the same time are quite large,” Posen said today. “Can we, in somewhat coordinated way bid it down a bit, or more accurately, ideally, spread it over more years?”

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