An agenda for the Federal Reserve’s review of its monetary policy framework


An agenda for the Federal Reserve’s review of its monetary policy framework



Europe and the IMF

Domenico Lombardi
Domenico Lombardi Director, Policy Observatory - Luiss University, Rome, Former Brookings Expert

October 19, 2007

Once again, Europe has secured the top two positions at the IMF. In a few days, a former French Finance Minister will be the new Managing Director. Shortly after his selection came that of the new Chairman of the IMFC—the IMF’s ministerial steering committee—with the Italian Finance Minister taking over from his former British colleague, the proximity of the selections highlighting another privilege accorded to Europeans.

This has generated disorientation in not a few circles, some even European, in light of developments witnessed of late, namely:

i) The increasing trend towards transparency and good governance. These principles—advocated by the same IMF—make backroom deals unacceptable for a multilateral institution that bases its very existence on its legitimacy as perceived by its stakeholders. The globalized institutional setting in which key decisions are now made implies that the benefit accruing to a state or a region in keeping such privileges for itself has become disproportionately low in comparison with the resulting loss of legitimacy for the IMF. This, in turn, hampers the institutional effectiveness of a cooperative agency like the Fund.

ii) The balance of power within the global economy, which is shifting towards other more dynamic regions that now demand a greater say in global decision-making, backed by the accumulation of huge reserve assets that compromise the essential reserve-pooling function for which the IMF was created.

iii) The political and economic clout of European states, which appears to be on a declining path. Recent studies point to a substantial reduction in the aggregate voting power for Europe, and this has made for a defensive attitude on the part of some European political circles as far as any progress on the reform of IMF governance is concerned.

As a result, Europe—the world champion of regional cooperation—is perceived more and more as a hindrance to the workings of the premier institution established to promote global economic cooperation, by sticking to the status quo.

But now that the contest for the top two positions is over, it is a good time for Europe to re-examine its role in the governance of the IMF and to formulate a proactive and forward-looking institutional strategy. And this can only start from a re-consideration of its representation at the Executive Board, the policy-making organ of the Fund.

The limitation of the current debate on IMF reform is that it overlooks the issue of effectiveness of representation and focuses squarely on traditional indicators of power, such as quotas and voting shares. Does this mean then that the EU, with its 32 percent of voting power, carries twice as much weight as the IMF’s largest single shareholder, the US, with its 17 percent? Does it mean that the collective voice of the seven Board representatives from the EU is seven times louder than that of the largest shareholder’s representative when it comes to actual decision-making? The answer is, indubitably, no.

The EU could carry greater weight, if it pooled its voting power in a single chair at the IMF’s board, making the inevitable dilution in its voting power a second-order issue. The institutional setting is already there. For many years EU member states have coordinated their own positions on the IMF in dedicated fora in Brussels, Frankfurt, and Washington. Recently, for the first time, their IMF Board members elected from amongst themselves a “Mr EU.”

The issue at heart is that until these arrangements are shaped into a coherent institutional framework with a clear political mandate, as implied by a common single-EU or euro-area representation, a proliferation of coordinating procedures will not make much difference, let alone leave room for more Asian and African representatives in the IMF Boardroom. This needs not be seen, however, as an insurmountable challenge, especially by those countries in the EU that have already voluntarily surrendered their monetary sovereignty to another supranational institution, the ECB.

Recent history tells us that technocrats can plant the seed of European integration, but without a handful of bold politicians to tend to it, it is a plant unlikely to grow.