- To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.
The International Monetary Fund played a leading role in responding to Greece’s financial crisis. It has also issued sharp warnings to other European countries and the United States about their debt levels, fueling debate over the institution’s role in the global economy. Domenico Lombardi, president of the Oxford Institute for Economic Policy, a senior scholar at the Brookings Institution, and a former executive board member for the IMF and World Bank, says countries need a strong multinational finance institution to respond to the increasingly globalized financial system. Western countries should increase their support for a strengthened IMF, he says, but they should also demand reform, especially for more equitable IMF voting rights. Otherwise, more regional financial monetary funds may detract from global coordination. "When [countries] feel that their voting power is not in line with their international economic status, with their economic size, they have an incentive to break away," says Lombardi.
A recent report (PDF) by Senator Richard Luger questioned whether the world really needs the World Bank, the IMF, and the international development banks anymore. What is their relevance today and how has it changed post-financial crisis?
This recent financial crisis has proven the importance of improving international coordination, improving international response to the escalation of a financial crisis. It would be unwise to withdraw support from the IMF and from the other multilateral institutions so soon after we have seen how important international cooperation can be.
Let’s just revisit what the IMF did in the context of the crisis: The U.S. approach was to immediately leverage on international cooperation to avoid spillovers from the U.S. financial sectors and European countries to the rest of the world. And overall, that strategy has been very effective. The key pillar in that strategy was the International Monetary Fund. Reconfiguring the role the IMF can play in a financial crisis might be unwise, because we have seen what a strong multilateral institution can do. Support to the IMF should be conditioned to stronger reforms. And there are a number of reports that have been drafted on the topic of IMF reform. The IMF has come up with an agenda, and member countries--especially key member countries like the United States--should really put their weight behind the current IMF reform efforts and demand for more reforms rather than less.
"We now live in a world dominated by private international capital movement. The scale of those capital flows is massive compared to the current account transactions we had sixty years ago and therefore the IMF needs to adapt."
Which reforms will be most important in boosting the IMF’s legitimacy internationally?
Reforms are currently focused on increasing the voting power of emerging-market countries and developing countries. However, we should also go beyond quota reform and address what member counties want from the IMF compared to what the Bretton Woods founding fathers wanted in 1944. This question has not been answered and cannot be answered by the IMF itself. It should be tackled by IMF member countries.
Against the backdrop of globalizing financial activity, there is a central institution with an oversight role, a strong surveillance role, capable of developing an early assessment whenever countries are turning into a crisis. It needs to have the financial capability to be able to address serious financial shortfalls that any country can have during a crisis. It was established sixty years ago as essentially an institution to support current account crises. We now live in a world dominated by private international capital movement. The scale of those capital flows is massive compared to the current account transactions we had sixty years ago, and therefore the IMF needs to adapt.
Do European countries see their authority threatened by an increased role for the IMF, as we saw in Greece?
The recent involvement of the IMF in the Greek crisis has shown to the Europeans that the IMF is not just one of the several international organizations located in Washington; it can be of help. Europeans who have been very inward-looking in recent decades might certainly discover the importance of multilateral financial institutions like the IMF. Any quota reform will imply a reduction in size of the European voting power and European representation. This is really a critical issue because as the Greek crisis has shown, there’s not yet in Europe a shared political view of the euro area. I don’t see in the short run any consolidation of the European representation. And this might still be a block that needs to be overcome, because we need to reshape the function of the main policymaking body of the IMF, the executive board. Right now the executive board is dominated by Europeans who hold about one-third of the seats, and any attempt at reshaping the composition of the board will need to involve a consolidation of the European representation. The United States has some leverage there. I’m not sure it is willing to use it, but it can certainly foster European consolidation.
Should reforms also involve a reduction in US voting power?
Not really. The simulations that have been conducted so far show that the United States will not need to reduce its voting power, and this is a double-edged sword because on the one hand, it is easy for the United States to tell other countries: "Look, you should give up something" when you are in a strong position. But this also is a weakness because it means the United States cannot lead by example, where it could say "We’re going to give up something; you Europeans should do the same."
Are there capacity constraints to the IMF playing a larger role in developed countries?
"The IMF involvement [in Greece] is just a reflection of the deep disagreements among European leaders on the future of the euro, whether it is currency union and if it should be more than that."
Above all, that really depends on the extent to which [developed countries] political leaders are willing to delegate sovereignty to the IMF. It’s not just a matter of increasing or strengthening the financial surveillance and economic surveillance. It’s a matter of being willing to use the prescriptions that would come out of a strong IMF surveillance. An example: Even if the IMF had been able to detect early signs of the recent financial crisis, would key member countries have listened to the IMF’s advice? Would the key member countries, not just the United States, but also European countries, have been available to implement corrective policies? I’m not sure. The key question is to what extent systemically important countries are willing to rely on the IMF as a facilitating forum. There have been some encouraging signs. The IMF has been heavily involved in the G20 process and will be the technical advisor to the G20 on macroeconomic coordination. That is important, but it’s still an advisory role. The IMF charter really posits itself as the central institution to oversee the international monetary system. So we are still far from that final objective.
Some analysts say the IMF’s role in the Greek crisis has been an embarrassment for the European Central Bank. Is the IMF playing an appropriate role in Greece?
The ECB should have not played any role in the Greek crisis, and it has not played any role. But it has been an embarrassment for the euro-area political leaders. Because the euro is not just a currency union. It was meant when established to be an intermediate step toward an ever closer union and eventually a political union. It would have been important if European leaders would have taken political ownership of the Greek crisis, which would have entailed providing financial support to Greece to avoid a default on its debt and contagion to other euro-area countries. It also would have set in place the conditions for more sustainability of this [EU] political project in the long run. And that has not happened.
The IMF involvement is just a reflection of the deep disagreements among European leaders on the future of the euro, whether it is currency union and if it should be more than that. The situation also highlights a lack of a vision in terms of the euro as a global currency. The euro is the second global currency in the world after the U.S. dollar. Analysts even in the United States have predicted that the euro could eventually take over the role of the dollar as the main international currency. Now the question is, to what extent is the IMF involvement consistent with the status of global currency? European leaders should take a broader, more long-run view on how to avoid a repetition of such a crisis, and what mechanisms they should put in place if a similar crisis happens in future.
Where does that leave the IMF in responding to these developed-country crises?
First, it’s really up to the member country to request IMF help. As long as any member country wants to request IMF assistance, it’s perfectly entitled to do so. Then the IMF is free to make an assessment and decide whether and on what terms to intervene. But in the intervention architecture, the IMF was established as the central institution which would support balance of payments problems. When there is a lack of ownership, when some members feel disenfranchised from the institution, when they think they don’t have enough voice or they feel that their voting power is not in line with their international economic status [or] with their economic size, they have an incentive to break away. This is evident in Asian countries, which just a few days ago announced putting in practice an embryonic Asian monetary fund. It is perfectly legitimate for countries to set up their own regional facilities, but it would be in the interest of the global economy to make sure that these regional facilities are integrated in a logically consistent global framework.