A Reformed IMF Deserves More Money, Though Not for Europe: View
The International Monetary Fund’s new managing director, Christine Lagarde, is calling on members to increase the institution’s lending capacity by as much as $500 billion. The IMF says it might need to provide $1 trillion in support to distressed governments over the next few years, and existing resources aren’t enough.
The governments being asked to pony up will take some convincing. They suspect a scheme to bail out Europe’s struggling treasuries -- and think Europe has enough resources of its own to fix its problems. They are right, but they are missing a larger point.
The economic crunch of the past four years has shown that the world needs the global lender of last resort that the IMF was originally intended to be. This means not just more financial resources -- a bigger increase, in fact, than Lagarde is seeking -- but also new rules for access to them and a new understanding about how the IMF is run. These reforms must be all of a piece.
In a statement last week, Lagarde linked the request for new money to “the necessity and urgency of collective efforts to contain the debt crisis in the euro area,” emphasizing the weakest reason to strengthen the fund. The U.S. Treasury’s response was a curt “Europe has the capacity to solve its problems.” Timothy Geithner, the Treasury secretary, even warned his international peers that the U.S. has no intention of seeking additional resources for the IMF. The governor of the Bank of Canada said much the same.
Europe’s management of its economic crisis has been lamentable, and the costs of this serial failure of leadership are a burden on other countries around the world. New support for bystanders hurt by Europe’s dithering is one thing, but to ask other countries (including many a lot poorer than France or Germany) to come to Europe’s aid adds insult to injury.
Europe has the means to solve its problems, as we have argued for months. All it lacks is the will.
Nonetheless, the world does need a refurbished IMF. When the economic crisis first struck, efforts to coordinate national responses, with the fund at the center, were impressive and helped to calm nerves. But the momentum has petered out. Ad hoc cooperation is the order of the day, and the IMF’s role and purpose are again unclear.
This is costly. The international transmission of economic stress is the most arresting aspect of the current crisis. A global body capable of reducing financial risk ahead of the fact, and coordinating adjustment efforts after the fact, is what the IMF was always meant to be. Such an institution is needed more than ever.
Extra financial clout is part of what’s required. Member governments have moved to strengthen the IMF’s finances. Euro-area countries, for instance, recently pledged an additional 150 billion euros. As part of her drive for new resources, Lagarde is said to be pressing Brazil, China, India, Japan, Russia and the big oil-exporters for more.
In the most recent midcrisis review of the IMF’s balance sheet, “quotas” -- the amounts that governments commit to the IMF as a condition of membership -- were doubled to about $750 billion. Members’ shares were realigned to nudge up the voting power of the big, fast-growing developing countries. The next review is under way. It needs to keep pushing for added financial capacity.
The reason is that the IMF, unlike a central bank, can’t print money. To serve more effectively -- albeit in precisely targeted ways -- as a kind of global central bank, the IMF needs more resources and more financial flexibility.
For instance, governments should design a procedure that would allow, in emergencies, for temporary allocations of so-called “special drawing rights.” SDRs are the IMF’s quasi-currency, which governments can hold alongside national currencies as international reserves. In effect, the creation of new SDRs expands the global money supply. The fund could exchange its new SDRs for national currencies and lend these out to distressed governments. This would supplement current arrangements, which rely on ad hoc swap lines among the U.S. Federal Reserve and other central banks, with something more predictable and systematic.
Any drive to expand and empower the IMF must also include better rules to control members’ access to the IMF’s bank account. At the moment, access is often too slow. The goal should be to let governments get help faster, so long as they have qualified in advance by maintaining a record of good policy.
Again, progress has been made: The IMF has a “flexible credit line” and a new “precautionary and liquidity line” is being rolled out. Both allow faster access for qualified countries. But still greater emphasis should be placed on speed. The key here is surveillance. The IMF already monitors its members’ policies, but in normal times this oversight is not taken seriously. It exerts even less pressure on governments than the more cursory view of, say, a credit rating service.
The traditional cycle, as a result, is forbearance before a crisis hits, then IMF-sanctioned austerity afterward. Pre-crisis surveillance needs to be given a higher public profile -- which will also give it teeth. Countries in good standing, and innocent bystanders hurt by the mistakes of Europe and other countries, could then get extra support faster and without stigma.
It bears repeating that the new IMF director, a European as custom dictates, is open to suspicion of special pleading. Reforming the IMF should include ending the practice of putting a European in charge there and an American in charge of the World Bank. No defense of this outrageous arrangement is possible, or any longer even attempted. Add its termination to the list.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.