By Martin Wolf
Financial Times, 24 May 2011
Financial Times, 24 May 2011
The king is dead; long live the queen. Dominique Strauss-Kahn, the French erstwhile managing director of the International Monetary Fund, had not even resigned before Europeans started to coalesce around Christine Lagarde, the French finance minister, as his successor. Gone are past promises of an open selection. The Europeans insist on the principle that what we have we hold. The ancien régime survives.
Mme Lagarde is a perfectly respectable candidate. She is French, almost a requirement, it often seems, for the European head of an international institution. She is a woman, surely an advantage, not least when her predecessor is facing charges of attempted rape. She was chairman of Baker & McKenzie, a famous US law firm and she speaks English fluently. She is an extremely likeable and impressive person. But she is not a perfect candidate: her economics are limited. If she were to become head of the organisation she would have to rely on the advice of those around her. If she were to get the job, it would be essential for whoever replaces John Lipsky, the American first deputy managing director, who is due to depart in August, to be a first-rate economist.
I write as if she is going to get the job. I am quite sure she is. As of today, the European Union still has 32 per cent of the votes (see chart) and the US another 16.7 per cent. If the latter supports them, as I suspect it will, the Europeans will have no difficulty in obtaining additional votes from countries dependent upon them. Why might the US support the Europeans once again? One reason is that the US has not yet given up on the old bargain, which gives it a permanent lock on the presidency of the World Bank. Indeed, the Americans will probably tell themselves that the chances of getting any money from Congress for World Bank programmes (above all, its concessional lending arm, the International Development Association) if the Bank’s head is not an American is close to zero.
To be fair to the Europeans, the emergence of the IMF during the course of the current crisis as what is, in effect, a European monetary fund gives an understandable urgency to their desire for control over an institution that has played a vital catalytic role in the response to the crises not just in Europe’s western and eastern periphery, but inside the eurozone itself. As of April 2011, 79.5 per cent of IMF credit outstanding was to European countries, 52.9 per cent in the east and 26.6 per cent in the west of the continent (see chart).
The response of Europe’s critics is one of vociferous condemnation: did any one, they ask, think that the head of the IMF needed to be an Asian to deal with the Asian crisis of the late 1990s or a Latin American to deal with the crises in that continent in the 1980s or 1990s? Of course not. So why should a European be needed to clean up the mess the Europeans have now made of their affairs? The claim traditionally made by advanced countries is that their nationals should run international organisations, because they are relatively competent. Today’s European disarray is, the critics note, a disproof of this proposition.
The Europeans’ argument is, in my view, stronger than these critics will admit. The eurozone is a very special (and, in my view, quite dangerous) construction. When the IMF lends to Greece, Ireland or Portugal, it is directly affecting the monetary and financial stability of all other members of the eurozone. It is almost as if it were rescuing, say, California from a looming default. It is, I think, understandable that leaders of powerful countries, such as Germany or France, want to feel complete trust in the management of an institution that is performing such a vital function for themselves. Indeed, it was for this reason that I initially thought the IMF should not have been involved inside the eurozone at all: it would ultimately subvert the IMF’s own independence.
While I find this European argument has some force, it does not have enough force. The counter-argument is that it is in the Europeans’ interest to receive unbiased and independent advice from the IMF. That, Mr Strauss-Kahn could not give. Mme Lagarde will not be independent either. But someone is going to have to make Europeans recognise that debt restructuring will almost certainly be needed and that, given this, it would be better to fix financial systems directly, rather than indirectly via lending to quite possibly insolvent governments.
On balance, then, I do not think the case for a European head of the IMF is made overwhelming by the current crisis. Then one has to recognise the enormous advantages in terms of the global legitimacy and effectiveness, not just of the IMF, but of the multilateral institutional order, of making a transition to open global selection of the IMF’s new head. It has to be recognised that the place of the old advanced countries and of Europe, in particular, in the world economy is declining rapidly. According to the IMF’s own statistics, the share of the EU in global output, at purchasing power parity, will shrink from 25 per cent in 2000 to 18 per cent in 2015 – an astonishingly rapid rate of decline (see chart). The EU remains over-represented in the IMF: even after all the reweighting, the voting share of the Netherlands will be 1.76 per cent, against 2.62 per cent for India.
The best course, I believe, would be to commission a high-level search committee. Candidates should also set out their prospectus for the future of the IMF: there are many big issues ahead, including global monetary reform. They should then be chosen by the members on merit.
The criteria used should, however, be far more than technocratic. An understanding of economics is indeed important. So, too, is proven political ability, toughness and experience as a successful high-level policymaker. The person chosen should be willing to take the risks of leading. In that respect, Mr Strauss-Kahn excelled. I would not myself exclude a European, as some I respect would. But the time has come for the incumbent powers to recognise that they cannot continue to dominate the global scene. If they persist in running these institutions, the rising powers will, inevitably, turn away from them altogether, to create replacements they can control. This would Balkanise management of the global economy, to no one’s true long-term advantage.
Regimes that do not bow to the winds of change get blown away. The Europeans need to recognise that truth in time. They will not do so. But it will prove a big mistake.
