Debt crisis demands IMF's bigger role

Dominique Strauss-Kahn has led the IMF since 2007. His successor may, for the first time in the fund’s history, be someone who is neither from Europe nor North America.

The fund, which earlier in the decade seemed dormant and even irrelevant, is back in a big way. This year alone, it has inaugurated loan packages or credit lines to Colombia, El Salvador, Greece, Jamaica, Mexico, Poland and Ukraine, among others. As Ireland joins the list, many investors are raising questions about Portugal and Spain.

The biggest economies have turned to the monetary fund to monitor the trade imbalances and currency tensions that threaten global cooperation. The fund is lecturing Europe — the continent whose devastation led to its creation in 1944 — on the need for economic changes. Its bungling of the Asian financial crisis of 1997-98, widely regarded as a low point that soured emerging markets on the monetary fund, has been seemingly forgiven, if not forgotten. Under pressure from the United States, Europe has ceded two seats on the fund’s board as part of a broader effort to better represent China and other fast-growing developing countries in decision-making.

The IMF has reassessed some of its long-held orthodoxies, like its aversion to capital controls and its insistence that central banks maintain a very low target for inflation. The public face of the IMF is being revisited as well. At a European Central Bank conference in Frankfurt on November 19, Strauss-kahn said that the continent’s stellar growth in the postwar decades — fueled by technological adoption, growing integration and a strong banking system — stalled in the early 1980s.

He cited hurdles to growth: chronically high unemployment (and its high social costs), stagnant productivity in southern Europe and a financial sector focused more on arcane innovation than on support for the small start-up businesses that drive job creation. “As the postcrisis world takes shape, Europe risks being left even further behind, especially as the dynamic regions of the world are bolting out of the stables,” he said. “Europe must break the shackles of low growth and stop settling for second best. This is the only way to save the social model and fulfill the common European destiny.”

Strauss-Kahn urged changes to bring about a “single labour market” like the European Union’s common market for goods, and raised the delicate issue of rebalancing growth within Europe, gently prodding Germany — the export powerhouse at the center of the union — to stimulate domestic demand.

And he urged national governments to grant more authority in matters like research and development and budgetary policy to the European Union, saying that “peer pressure has not served Europe very well” and “countries must be willing to cede more authority to the center.”

The fund’s advice is in some ways even more significant than its financing, which is based on contributions from member countries and has increased as a result of the crisis. The European Union is financing most of the bailout for Greece, for example, but is relying on the IMF to monitor the fiscal and tax changes there, and the repair of the banking system in Ireland.

“It’s not so much that they need the IMF’s money, but that they need the IMF’s mechanism for being able to monitor policy reforms,” Vreeland said of the Europeans. While the realignment of economic power has been painful for rich countries, it has provided an unanticipated boon for the IMF’s mandate.

The Group of 20 economic powers has given the IMF the task of helping to untangle the thorniest problem threatening global economic coordination: the persistent balance-of-payments imbalances that bind Asia and America in an uneasy embrace.

A summit meeting of the G-20 leaders, including President Obama, in Seoul, South Korea, ended on November 12 with vague and convoluted promises to redress global imbalances. Whether the fund can persuade Beijing and Washington, and not merely Dublin and Athens, will be one its greatest challenges in the coming months.