x Abu Dhabi, UAESunday 23 July 2017

Euro zone panic is the best reason for a European IMF chief

Developing-economy countries will complain when the International Monetary Fund chooses a new head from Europe, as it will, but there's good reason for the selection of another European chief: the IMF's main current concerns are overwhelmingly European.

Now that Dominique Strauss-Kahn has quit as the head of the International Monetary Fund, the appointment of his successor is causing a rift between the West and the rest. While the Europeans have staked their claim to the Fund's top job, emerging economies seem determined to break Europe's historic grip on the post.

Since it was established in 1946, the IMF has traditionally been run by a European, while the presidency of its sister organisation, the World Bank, has gone to an American. With the global balance of power shifting from north to south and west to east, many believe that it is time to end this duopoly.

The jockeying has intensified as countries position themselves and push for their preferred candidates. Even before Mr Strauss-Kahn's resignation last week, various leaders in Europe had called for a European chief, provoking fierce opposition from rising powers and campaigners. Brazil's outspoken finance minister Guido Mantega reflected their view when he declared: "We must establish meritocracy, so that the person leading the IMF is selected for their merits and not for being European."

At the weekend, many European governments appeared to coalesce around Christine Lagarde, the French finance minister, who is one of Europe's most highly regarded economic officials. If, as expected, she gets US backing, her appointment by the Fund's executive board would be a foregone conclusion. In that case, there's little doubt that emerging markets and developing countries will denounce what they see as yet another western stitch-up.

Of course, the Europeans have no divine right to the office of IMF managing director. In principle the position should go to the most qualified person, irrespective of geographic origin. There are many able candidates from emerging markets, notably Singapore's deputy prime minister Tharman Shanmugaratnam, Brazil's former central bank chief Arminio Fraga or South Africa's finance minister Trevor Manuel.

But the case for a European successor to Mr Strauss-Kahn is overwhelming. Next to the United States, Europe led by Germany and France contributes the most to the Fund. But there is an even better reason. With about €100 billion (Dh520 billion) in loans to euro zone countries, the IMF's most important programmes are currently in Europe. Without Mr Strauss-Kahn's decisive intervention last year, failure to bail out Greece would have led to a very messy default.

One year on, the euro zone banking and sovereign debt crisis is once again so contagious that it threatens global financial stability. Greece may be a small economy without a financial sector that has systemic relevance, but a Greek default has the potential to create panic on world markets.

Institutional investors would almost certainly sell off much of their euro-denominated debt, especially Irish and Portuguese debt. That, in turn, would hurt many banks and sovereign wealth funds that hold bonds from euro zone countries. It would also raise the borrowing cost for the euro zone countries in trouble, including Spain and possibly Italy. As the world's lender of last resort, the IMF is an indispensable source of financial assistance to governments in distress.

With Greece once more on the brink of debt default, the future head of the IMF needs to understand the specifics of eurozone economics. He or she also needs to be good at fractured European politics, divided between the national and EU levels. This is not to mention the number of institutions and interlocutors, a veritable labyrinth that easily dwarfs Byzantium or the Ottoman empire. Most of all, the Fund's next managing director needs to have the ear of the German and French leaders who call the shots in this arcane system.

If Ms Lagarde or another European takes over from Mr Strauss-Kahn, their first task will be to face down opposition to bailouts, both inside the IMF and beyond. Ms Lagarde is seen as an ardent advocate of bailing out over-leveraged banks and embattled countries. One former senior official at the Fund said that Ms Lagarde's appointment would send the worst possible signal: "She's the most pro-bank bailout. We are going with the total bank protection plan. That would be a disaster."

So less than three years after Lehman's demise plunged the world economy into the worst recession since the Great Depression of 1929-32, support to let banks fail and countries default on their debt is growing. This, coupled with austerity policies and interest rate hikes in the face of growing inflation, threatens a repeat of the financial crisis that would derail the global recovery.

So under its new head, the IMF needs to continue its shift away from a purely neoliberal agenda towards a more nuanced approach designed by Mr Strauss-Kahn - including capital controls, international monetary reform and a robust industrial policy. That would serve the interests of both emerging markets and developing countries.

Since neoliberalism was a terrible western invention, it is crucial that the West embraces and champions a new economic vision. Paradoxically, a European successor to Mr Strauss-Kahn can increase the Fund's legitimacy by getting the job in the euro zone done and charting an alternative political economy that will be taken forward by the most able candidate from outside Europe. Thus the West would leave a better legacy instead of a poisoned chalice.

 

Adrian Pabst is a lecturer in politics at the University of Kent, UK, and a visiting professor at the Institut d'Etudes Politiques de Lille (Sciences Po), France