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The IMF’s thorny transatlantic feud

September 10, 2010
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by Kati Suominen

In a move likely to please China, India, and Brazil, but force a confrontation with Europe, the Obama administration last month blocked plans that would maintain the current size of the board of directors of the International Monetary Fund (IMF). This is the strongest U.S. effort yet to boost emerging markets’ influence in the world financial body. Washington wants a 20-member board, down from the 24, with Europeans, currently holding nine chairs, incurring the cut. Europeans balk at the idea. The standoff will have to resolved by October 31, when the mandate of the existing board expires, and the institution will become rudderless.

The American demands are nothing new. The George W. Bush administration called for shrinking the Fund board by halving the number of European chairs. Germany, France, and Britain have long had their own, non-rotating seats on the board, while Belgium, the Netherlands, Spain, Italy, Denmark, and Switzerland represent groups of countries.

Another bone of contention is the Europeans’ (EU members plus Norway and Switzerland) 34 percent share of the Fund’s voting power, the largest regional voting bloc. The United States holds a 17 percent share, enough to give Washington a veto over the rare but important decisions that require an 85 percent majority. In contrast, China, now the world’s second largest economy, has its own chair on the board, but holds only a 3.7 percent of the Fund’s voting power, less than France or the U.K. India’s share is 1.9 percent.

At the September 2009 G20 Summit in Pittsburgh, the BRICs – Brazil, Russia, India, and China – called for a seven-percentage-point increase in emerging markets’ voting share, so that their collective share would equal that held by the advanced countries. They also demanded changes in the Fund’s board and a “merit-based” selection of the Fund’s director, which is, by tradition, given to a European. The United States suggested a compromise: a five-percentage-point increase in the emerging market quota, to be attained by 2011. This got a hesitant reception in Western Europe, the likeliest loser in any such reshuffling.

The United States believes that emerging markets, if sufficiently disgruntled with the status quo, will become increasingly difficult to work with on international economic issues. Washington also worries that instead of growing into responsible stakeholders in global governance, emerging markets will drift away from the Fund and set up parallel regional financial facilities, where the United States and Europe would have no influence.

The recent chair demand also reflects Washington’s frustrations with Europe’s persistent opposition to IMF reforms and unhappiness with European austerity measures.

In Europe, however, the chair issue is particularly thorny. The European Commission has long called on the member states to converge on a single chair, which would give Europe veto power in the IMF. The head of the European Central Bank, Jean-Claude Trichet, recently made a similar plea.

The reapportionment of chairs is not so far-fetched given Europe’s increasingly integrated foreign policy and financial regulations. Eurozone members already inherently share a position on exchange rate matters at the IMF, for example.

But no European nation wants to yield. One reason is that Europeans pursue distinct national agendas in the Fund. For example, Germany worries about the inflationary effects of IMF loans, the U.K. tends to focus on financial policy and regulatory issues, and the Netherlands and the Nordic countries stress concessionary finance to the poorest countries.

Intra-European politics are also at play. No European leader wants to pressure his or her counterparts into relinquishing powers, as that could jeopardize subsequent collaboration in European affairs. France and Britain want to avoid an outcome where Germany remains the only European sovereign in the Fund’s non-rotating top-eight, and certainly resist losing their sway vis-à-vis China or Russia.

Europeans also resist change to extract concessions, such as a commitment by emerging nations to embrace Fund assessments of global imbalances and exchange rate policies, and to increase their still-low contributions to the Fund.

Europeans are correct to insist that emerging nations match any new rights with new responsibilities. But it may be that boosting emerging countries’ powers is the only way to ensure more responsible behavior. Absent a stake in the system, emerging markets are guaranteed not to play nice. Preserving the post-war multilateral economic order, a stunning transatlantic success story, requires reforming it by tying emerging markets into it.

The first step is for Western Europeans to give emerging markets the five percent increase in their voting share that has already been agreed upon.

Step two is a staged consolidation of the number of European seats on the IMF board. Granted, Europeans have a chance to turn the confrontation to advantage, by counter-proposing that they hold a single chair. That would force Europe to act in a united fashion and lend the continent powers to steer the emerging nations in the right directions.

Both Europe and the United States have a stake in a successful 21st century global order.. To ensure that, it is high time the Europeans acknowledge they need to curb their predominant role in the IMF.

German Marshall Fund

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