Given the depth and complexity of the Eurozone crisis , many observers say the next IMF chief should be from Europe. Phooey! During the Asian financial crisis, nobody suggested that the IMF should be headed by an Asian. Indeed, Asians were regarded as singularly unsuitable because of the need to impose politically unpalatable conditions on Asian borrowers. Ditto for Europeans today.
Other analysts want an IMF chief from the Third World. Possibilities include Kemal Dervis of Turkey; Armino Fraga of Brazil, Shanmugarathnam of Singapore, and Montek Ahluwalia of India. However, this debate on nationality misses the most important issue. The IMF today needs to be headed by a technocrat , not a politician. It is a lender of last resort and such must be tough and unswayed by political considerations. This should rule out European politicians like Christine Lagarde of France.
No country is obliged to go the IMF. Countries in trouble can tap other sources of finance – commercial lenders, aid donors and friendly foreign powers. If after all this, a country is still bankrupt, its current economic structure is obviously unsustainable, and it needs painful structural adjustment. Many politicians who see the need for painful change pretend otherwise , and say they are being forced to reform by the IMF. So, the IMF plays a useful role as a political scapegoat.
Now, some IMF programmes have been badly designed and have failed. But the case for better design is completely different from being soft. Handing out money without tough conditions to attain sustainability is a recipe for failure – the loan will soon be spent, and without structural change will not be repayable. For this reason, no European politician should head the IMF today: the temptation to go for soft non-solutions will be too great. A technocrat can readily see the heart of the Eurozone problem: it is a monetary union but not a fiscal or political union.
The common currency (euro) means no uncompetitive member can devalue to become competitive. Neither is there any compulsion for strong states (like Germany) to bail out uncompetitive ones (like Greece and Portugal). This arrangement is fatally flawed. One way out is for Greece and other uncompetitive states to leave the Eurozone, revert to their old currencies, and restore competitiveness through large devaluations. Europhiles shudder at the prospect. An alternative solution is to convert the monetary union into a political union, a United States of Europe.
In such a political union, welfare funds will automatically flow from flourishing to bleeding states, and no IMF or outside help is required. A halfway house could be a fiscal union that falls short of political union, and is strong enough to provide automatic fiscal support to weak states. However, public opinion in Germany and Scandinavia strongly opposes using taxpayer money to rescue spendthrift Greeks and Portuguese, and want bailouts to end. Yet these countries are unwilling to admit what outsiders can see – that Greece is insolvent and cannot repay its debts.
One solution is to write off a big chunk of Greek debts. But that will imperil European banks holding Greek loans; so the ECB chief has threatened to resign if Greek loans are restructured. In effect, the ECB is telling strong members they have an obligation to rescue the weak, or force the weak to become strong through excruciatingly painful reform. This represents a political crisis, not a balance of payments one that needs IMF help.
Till now, the IMF has focused on amassing rescue funds to temporarily assist Greece and weaker members. That phase is now over, and Europe needs to move toward a permanent solution – either abandon the monetary union or move towards full fiscal or political union. Some people say a European politician as IMF chief will be ideal for managing such a transition. But I fear any such politician – especially one wanting to return to politics after an IMF stint – will be tempted to go for unsustainable quickfixes. Critics say that an Asian or Latin American IMF chief would not have the clout to push through major political changes. Very true. But this simply underlines the fact that the IMF has a very limited role in what is fundamentally a European political problem.
The IMF was created to provide hard-currency loans to countries with balance of payments troubles. But Greece, Portugal and others have unlimited access to euros from the ECB. Their problem is fiscal , not lack of foreign exchange . The IMF has no business providing fiscal support to a member of a hard currency union. After all, it does not provide loans to California (which also has a fiscal crisis) because it is part of a hard currency union called the USA. The main challenge of the IMF right now is to counter the potentially serious global fallout from a Eurozone collapse.
The IMF raised $750 billion fresh money in 2009, but this sum pales in comparison with the problem, or indeed with funds available with the ECB or European governments. These institutions should sort out the mess, which is an internal fiscal/political one. Some analysts want the IMF to impose stiff conditions on Greece and Portugal, causing a deep recession that balances their books. But this looks politically impossible. Greek default and exit from the Eurozone look more likely.
The IMF should not squander its limited funds on Europe . It should conserve its resources for other nations that will be hit if the Eurozone collapses. This is why it should be headed by a technocrat immune to the temptations that afflict politicians.
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Thanks for great insight!