By George A. Pieler and Jens F. Laurson
The IMF and its managing director Christine Lagarde are pleased with themselves for assembling country commitments for $430 billion in additional emergency-ish financing to bail out Europe. Lagarde calls her agency’s resources “firepower” to complement what the financial press likes to call the “firewall”: Moneys deployed in defense of the Euro, through mechanisms—one supposedly temporary, the other a permanent fiscal adjustment mechanism—created by European politicians.
One woman’s firewall is another’s slush fund, which is why U.S. Representative Cathy McMorris Rodgers not only continues to warn against what she calls a “Euro-TARP” but also wants to rescind a standing $100 million commitment from the U.S. to the IMF. (That’s not likely to happen, but the U.S. has declined to contribute to the latest $430 billion IMF plus-up.)
What is really going on here? The U.S. is a very minor player in the Euro-rescue mission. The real bargaining is between Europe and the developing world, a.k.a. emerging economies, the very countries the IMF was created to assist in the first place. China, in particular, wants more leverage at the IMF if it is going to keep backing IMF commitments to Europe, which has always supplied the IMF leadership. Allegedly the bloc of emerging economies has been promised more control at the IMF if they keep playing ball on the Euro-rescue operation.
Meanwhile, the IMF-Europe nexus has many layers itself. The IMF doesn’t lend to “Europe” as a political entity, only to member nations (e.g. Greece, Portugal, Ireland). It is doing so in concert with the EU rescue funds and the European Central Bank (ECB). The IMF’s mission is supposed to be adjustment assistance to immature economies, conditioned on Fund-recommended fiscal reforms. That doesn’t seem to apply to Europe. The EU is supposed to set the conditions and the IMF just goes along for the ride.
If the IMF was created to aid developing nations, why should it invest in the mature, wealthy, albeit troubled economies of Europe? It shouldn’t. If IMF member states want to redefine the Fund’s mission to embrace declining economies as well, then it should formally amend its charter, with full and open debate among and within those member states; this matter is too important to be left to the IMF executive board alone.
That aside, what is the IMF trying to achieve? It can’t do more than increase the size of the fund available to bribe EU members into tightening fiscal policy (assuming that holds as the EU position). The IMF ‘slush fund’ is not even officially committed to Europe, but it can be assumed to be its current priority.
Lagarde objects to the notion that IMF funds are at risk anywhere in Europe, saying “no country has ever lost money on the IMF.” But if the IMF lends only to such perfect credit risks, why can’t the borrowing nations rely on private investors? Either the IMF is taking risks no one else is willing take, or it is doing nothing meaningful at all (except for state-financed market distortion). Debt could be paid down through de facto devaluation, either with inflation or state-negotiated deals to fix exchange rates; through stretch-outs (making some bondholders wait a good while before honoring sovereign obligations); or with slow-motion rolling defaults. This is particularly the case when sovereign debt like Europe’s is so strongly favored by financial regulators around the globe.
But the IMF is also playing Euro-politics. According to the Financial Times, the IMF is leaning toward the campaign to relax Europe’s already faltering fiscal demands on EU members at risk of default. Implicit in this is Lagarde’s push for the IMF to come down on the side of the new French position, defined by freshly inaugurated French President Francois Hollande: more state spending (‘investment’), higher taxes, and less pressure to restrain welfare and retirement benefits. This position endorses a ‘back to 2006’ agenda ignoring German pleas for austerity. Indeed, there were spells where Hollande seemed to campaign against Angela Merkel, more than Sarkozy.
This is a troubling if predictable development. Lagarde was expected to look out for Europe’s interests at the IMF. But not many foresaw she would facilitate a blatant IMF tilt towards France in intra-EU disputes. This may be the strongest argument yet for ending Europe’s domination of the IMF.
George A. Pieler is former tax counsel to the Senate Finance Committee. Jens F. Laurson is Editor-at-Large for the International Affairs Forum.
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