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[Viewpoint] A specious argument over the IMF

A managing director deeply enmeshed in European finance is unlikely to confront powerful European banks and governments.

June 11,2011
The replacement for Dominique Strauss-Kahn is emerging as yet another European — French Finance Minister Christine Lagarde. The Europeans are moving rapidly, before Asian or developing states can coalesce around non-European alternatives. But there is no functional reason for the IMF managing director to be a European. It is simply precedent, justifiable so long as Europe was the second major pole in the global economy with the U.S. But now there is a third, Asia, and Europe’s behavior in the last decade has delegitimized its claim for a “unique” IMF role.

Even before the Great Recession, Europe’s macroeconomics were poor. Unemployment was high and persistent, labor markets inflexible, national debt and deficits severe, and growth low. Supposedly, this was because Europe avoided “Wild West” Anglo- Saxon capitalism for a moderate social democratic model. Yet the Great Recession revealed that “cautious” Europeans were actually badly exposed to U.S. toxic assets, as well as extremely dependent on U.S. demand. The recession spread to Europe with a vengeance, igniting the astonishing euro crisis. The world assumed the eurozone had some mechanism to discipline its common currency; clearly, bondholders thought so. Yet now we see a continuing and stunning lack of focus and coherence that makes even the U.S. focus look good. Clearly there is no “competence” argument for EU leadership. That sank in the morass of the Greece/euro debt implosion.

Nor is there a “quality leadership” argument for Europe. Horst Koehler (2000-04) and Rodrigo de Rato (2004-07) were place-holding non-leaders who took the leadership place to springboard into higher office back home. And of course, Strauss-Kahn simply globally embarrassed the institution. The narrative of a powerful, wealthy white man assaulting a black immigrant maid is straight out of the anti-globalization movement’s worst nightmare. In fact, given how bad the last three managing directors have been, Europe should be dropped for a round or two. Just as the euro crisis should disqualify Europe, at least for awhile, so should Strauss-Kahn.

Finally, the argument that the IMF should have another EU leader because the IMF will be working so much in Europe in the near-future, is so specious as to be almost racist. Back when the Asian financial crisis hit (1997-98) and Westerners were dispensing painful but necessary advice to Asians, no one in the West worried about white bankers pushing that hard medicine. To say today that German Chancellor Merkel won’t trust anyone to run the IMF unless it is a European she knows, is so hypocritical, self-serving, and borderline racist, that it really should shock the non- Western IMF members into some pretty harsh language in response. If Europe wants to run its economy over a cliff, that’s its own choice. But the EU has no special claim to line up the globe’s resources (through the IMF) to bail out foolish Franco-German bondholders badly exposed in Greece, Spain and Ireland. For a counter-example, ask if California, with its own nasty budget crunch, should get an IMF bailout. No. Americans will wrestle through that on their own, and the EU should, too, on Greece and the other euro-miscreants.

In fact, if the IMF will operate mostly in Europe in the short-term, that is a strong argument for a non- European. The managing director should give unvarnished, difficult advice. A managing director deeply enmeshed in European finance is unlikely to confront powerful European banks and governments. Specifically, everyone knows Greece must restructure its debt, given its staggering bond yields (17 percent) and projected debtto- GDP ratio (150 percent by 2015). Politically connected bondholders reject any such “hair-cut.” But just as an independent, non-Asian managing director was able to push the Kim Dae-jung government into necessary but painful choices in Korea in 1997, a non-European could prod the EU.

This bald-faced selfishness and parochialism is yet more disturbing given regular European preening about the importance of multilateralism and international institutions in obvious contradistinction to “mercantilist” Asians or “cowboy unilateralist” Americans. Here is a golden opportunity for the EU to really improve global governance, to make it fairer, more democratic and more global. But no, they’d rather insist on tribal privileges.

Does it need to be restated that the IMF is a global institution, not a European one? The IMF has other lending responsibilities, and its non-European borrowers are vastly poorer than Greece or Ireland. The EU has huge resources compared to the IMF’s less developed countries, but I guess the IMF is supposed to be a global slush fund for the euro meltdown.

The real claim, of course, is tribal — the EU wants the position because it bolsters Europe’s otherwise declining claim to global leadership. But if the IMF can’t change with new realities — the rise of Asia and the BRICS (Brazil, Russia, India, China, South Africa) — then unfairly excluded states will simply abandon the institution. Asia has already flirted with the Chiang Mai Initiative, because it felt so high-handedly treated. I suspect this is why Asia is fussing so little about Lagarde and why Asian states avoid the Fund and stockpile their own dollar reserves, so who cares who runs it?

This is unfortunate. An Asia that turns away from the global liquidity pool, plus a Europe that treats it as a regional bailout mechanism, systemically strip resources away from less developed countries that most need the help. A truly international IMF would reduce the Asian incentive to stockpile, free up resources to support genuinely needy countries and prevent the regionalization of global finance.

*The writer is an assistant professor of international relations in the Department of Political Science and Diplomacy at Pusan National University.


By Robert E. Kelly



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