European Monetary Fund

The IMF is now of Europe, by Europe, for Europe

Recent statements by prominent personalities that the next managing director of the International Monetary Fund (IMF) could be from outside Europe may have been intended to assuage resentment about the continuing European dominance of the institution. Whether that purpose is served or not, the fact is that, in the past few years, Europe, apart from having a predominant role in the institution's governance and management, has also become its largest client by far. Disclosures in the annual report for 2013-14 indicate that Greece, Ireland and Portugal accounted for 84 per cent of the total sanctions made under the Extended Fund Facility (EFF), the institution's largest channel for providing loans to member countries. As of June 2015, Greece alone accounted for about 56 per cent of outstanding EFF sanctions; the next highest on the list was Ukraine, with 29 per cent. The Flexible Credit Line and the Precautionary Credit Line, two new facilities introduced after the financial crisis of 2008-09, have current sanctions to four countries - one of which is Poland - but no funds have been drawn from these as yet. Critics of the institution can legitimately point to these patterns as suggesting an effective capture - of Europe, by Europe, for Europe.

Of course, it could be argued that this is simply a reflection of the conditions in the global economy. Other countries do not need IMF resources because they are able to manage their balance of payments through market-determined flows. In other words, the pattern says more about Europe's problems than about the IMF's predilections. However, this view might be challenged by the way in which the institution has handled the recent Greek crisis. Many observers feel that it treated the Greek situation quite differently from its normal approach, which involves a firm, unyielding stance on fiscal and external sector reforms. Not only has the IMF been softer on fiscal reform in Greece than its other creditors, it has diluted its virtually evangelical view on exchange rates in this case. The cornerstone of its structural adjustment programme blueprints has been an insistence on moving away from a currency peg that artificially overvalues the exchange rate. In diagnosing the Greek situation, there is a strong case to be made that, in fact, the country's participation in the euro framework led to precisely this problem - an overvalued real effective exchange rate, which it could not adjust because Greece had no control over it. Going by the IMF's intellectual legacy, it could have put forward the case that exit, which would have allowed the exchange rate to adjust, was an option. But, at least on public record, it did not do this. Its focus was apparently on working with European authorities to preserve the arrangement; in effect, insulating the euro zone from the possible impact of a Greek meltdown. The capture hypothesis is alive and well.

On the basis of this record, the institution risks losing its credibility and legitimacy. Certainly, the grounds for it to seek more funds from members while its client base is shrinking and, that too, to a group of countries that dominates its governance and management, are flimsy. If it is to be restored to a position of truly global utility and value, governance and management must change. As a start, a non-European MD is not just a concession, it is an imperative.