How should the IMF spend its 430bn US$?
The annual spring meetings in Washington are over. The perhaps most tangible result is a sizeable increase in IMF resources. IMF lending power would be almost doubled as newly pledged resources amount to 430bn US$ to fight the crisis. The money was collected particularly with a view to the problems in Europe. But how should […]
The annual spring meetings in Washington are over. The perhaps most tangible result is a sizeable increase in IMF resources. IMF lending power would be almost doubled as newly pledged resources amount to 430bn US$ to fight the crisis. The money was collected particularly with a view to the problems in Europe. But how should these new resources be used and what conditions should be attached to them?
The IMF can provide typical financial assistance to one of its member states. Should a further country of the euro area get into financial difficulties, IMF resources could thus be used together with the EFSF/ESM to provide assistance to the country concerned. The logic of this assistance is that the vulnerable member states of the euro area are individually in difficulties and need country-by-country financial assistance. These assistance programmes would come with the typical conditionality that aims at improving national policies so that public finances return to a viable track, economic growth and adjustment is fostered and financial stability in the banking system is re-established.
This standard approach to financial assistance was recently undertaken in Greece, Ireland and Portugal and it may be justified in other countries of the euro area. The 430 bn US$ are a welcome increase that will allow one of the large euro-area countries to benefit from such a financial assistance programme. However, this approach will be inadequate if the crisis goes beyond country-specific problems. In fact, it becomes increasingly clear that we are witnessing a crisis of the euro area as a whole. It is not only individual countries; it is the design of the euro area that needs fixing as it is deeply flawed. How then can the Fund adjust its policies to the complex euro area reality?
An immediate solution would be that the Fund provides financial assistance to the euro area as a whole and imposes conditionality on the euro area as a whole. However, the current statutes of the Fund prevent it from providing assistance to a monetary union or other regional arrangements. In fact, the Fund can provide assistance only to its members and the euro area is not a member of the Fund. This is of course because euro area member states have so far failed to agree on integrating their external representation. And this failure reflects the unwillingness of euro-area members to form a true union with integrated fiscal and financial policies. This is the fundamental design flaw of the euro.
For countries outside the euro area that have committed a large amount of resources to the Fund, the design flaw of the euro area poses a dilemma. They can only provide assistance to individual countries while they would rather like to contribute to the solution of the problems of monetary union as a whole. A radical solution that these member states could therefore demand from the IMF is to only lend resources to the euro area and not to its members. This would require the euro area to unify its representation, form a political union and become a member of the IMF. The problem with this approach is that it would effectively prevent the Fund from lending while the house is on fire until long and difficult institutional adjustments and potentially a new Treaty are established. And indeed, Fund resources may be needed earlier to stabilize the euro area and prevent a major catastrophy for the world economy.
Instead, it appears sensible that the Fund adopts a more flexible approach. It should engage in further lending activities to euro-area member states when necessary. The conditionality should be focused on the problems of the member state. At the same time, the IMF should increase its pressure on euro area authorities to address the institutional design flaws. The IMF is currently stepping up its work on the euro-area financial system with a new Financial Sector Assessment Program report. This report should be used to be clear and specific on the elements needed to stabilise the euro-area financial system.
The larger the IMF’s involvement in countries of the euro area, the more it should demand from the Eurogroup collectively and Fund’s member states located in the euro area individually to address these design flaws. This is particularly warranted if it becomes clear that a member state turns to the IMF because of a euro area institutional flaw. In that case, conditionality should be extended to institutional reform. While the constitution of the euro area ultimately needs to rest on the will of the people of the euro area, the IMF’s role goes far beyond individual country assistance programmes. 430bn US$ should be spent to promote change in Europe.
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