DIIS Comment
Europe losing influence in the IMF
The Annual Meeting of the IMF unfolding in Washington DC this week is likely to sanction the biggest changes in decades in how the organization is governed, possibly reducing Europe’s influence
05 October 2010
Constitutional crisis
Up until late last week, there was considerable concern that the IMF was heading for a constitutional crisis. The burning issue was the number of chairs on the Board of the IMF. The US and the governments of some emerging market economies aim to reduce the number of European chairs, as part of a wider strategy to cut what they see as Europe’s over-representation in the organization.
The IMF's Articles of Agreement say that it is to have 20 chairs. Since the Articles were drafted the Board has grown to 24 chairs by mutual agreement of its member countries. Every second year, however, the extension must be put to a vote, which has always been in favor. This year, in August, the US unexpectedly announced that it would refuse to approve the extension; and since the US has a veto, the Board was suddenly faced with the prospect of eliminating four chairs, or a smaller number satisfactory to the US. Inside observers referred to this as the US "dropping the bomb".
If it had come to a vote, the four chairs with the least quota (and voting rights) of the 24 would lose their seat and drop out. At the current distribution of quotas, this would mean Argentina, French Africa, Brazil, and India.
The end of the IMF
The emerging market governments have made it clear that without Brazil and India fully at the Board table the IMF is not viable. As one senior emerging market official said in a recent interview, "If that's what the US and Europe want, fine, go ahead. But please realize that it will be the end of the IMF".
So the pressure was on Europe. The US and Europe had to negotiate a deal whereby the Europeans give up at least two chairs of their nine, and those chairs are transferred to emerging market economies. Only then would a constitutional crisis be avoided. The Europeans had been maneouvered into a corner.
The US - European deal
As a result of a deal struck late last week between European finance ministers and the US Treasury the Europeans will agree to share two of their nine seats on the 24-seat executive board with a leading emerging market government (so, for instance, Belgium will rotate the executive directorship with Turkey, instead of Belgium simply representing Turkey and some other countries on the board).
This was the minimum concession the Europeans thought they could get away with. It is well short of what the Americans initially wanted – Europe to give up four chairs. But the US Treasury found that emerging market governments did not give them the enthusiastic backing that they had expected, because confident that whatever happened in Europe-US negotiations they could only gain. The Treasury for its part had good reason to strike a deal with the Europeans so as to get this looming crisis off the table of the Annual Meeting, where the issue of the US Congress' recent threat to retaliate against China for currency manipulation is likely to prove inflammatory.
Quotas to emerging markets
Still to be decided at the Annual Meeting is the question of the reallocation of quotas (which translate into voting rights). The G20 leaders in September 2009 asked the IMF to shift quota shares "to dynamic emerging markets and developing countries of at least 5 percent from over-represented countries to under-represented countries", to quote from the communiqué. This is a fudge sentence, because some advanced countries are under-represented by the Fund's quota formula and some emerging market economies are over-represented. But however it is interpreted, the bottom line is that European states will loose votes, the emerging market economies will gain, and the US will loose nothing. With their gain, the emerging market economies get increased access to Fund borrowing as well as increased leverage in decision-making.
More power to the IMF Committee?
Another governance issue to be discussed at the Annual Meeting is whether the present International Monetary Fund Committee, composed of ministers representing the 24 seats on the executive board, should be strengthened by giving it – or a smaller and more manageable council of ministers – stronger authority over the managing director than it has at present. The current managing director, Dominique Strauss-Kahn, is known to favour this change. It would enable him to take directions direct from finance ministers and be less constrained by the civil servants on the resident executive board; and would, paradoxically, strengthen his own hand in managing the organization, reducing that of the executive board.
It is likely that the Europeans will manage to extract one important concession (although the pace of change in the negotiations is so fast that one cannot be sure). They are likely to be able to retain the existing gentlemen's agreement with the Americans, whereby they nominate the managing director of the IMF and the Americans nominate the president of the World Bank. True, the governing bodies of the Fund and the Bank in April 2010 called for the heads of both organizations to be selected through an open, non-nationality-restricted search, based on 'merit'. But the Europeans and Americans (backed by the American veto) can always ensure that a European is the most meritorious for the Fund and an American the most meritorious for the Bank. In return the Europeans agree not to press to remove the American veto.
Adjusting to multipolarity
For all the complexities, the larger significance of these developments is that the plates beneath the IMF are changing in delayed response to the rise of multipolarity. The emerging market governments are confident that history is on their side. The Americans are confident that they will not loose. The question for the Europeans is how they can continue to shape the organization even with fewer chairs and lower quotas, by upping their organization and determination.
Up until late last week, there was considerable concern that the IMF was heading for a constitutional crisis. The burning issue was the number of chairs on the Board of the IMF. The US and the governments of some emerging market economies aim to reduce the number of European chairs, as part of a wider strategy to cut what they see as Europe’s over-representation in the organization.
The IMF's Articles of Agreement say that it is to have 20 chairs. Since the Articles were drafted the Board has grown to 24 chairs by mutual agreement of its member countries. Every second year, however, the extension must be put to a vote, which has always been in favor. This year, in August, the US unexpectedly announced that it would refuse to approve the extension; and since the US has a veto, the Board was suddenly faced with the prospect of eliminating four chairs, or a smaller number satisfactory to the US. Inside observers referred to this as the US "dropping the bomb".
If it had come to a vote, the four chairs with the least quota (and voting rights) of the 24 would lose their seat and drop out. At the current distribution of quotas, this would mean Argentina, French Africa, Brazil, and India.
The end of the IMF
The emerging market governments have made it clear that without Brazil and India fully at the Board table the IMF is not viable. As one senior emerging market official said in a recent interview, "If that's what the US and Europe want, fine, go ahead. But please realize that it will be the end of the IMF".
So the pressure was on Europe. The US and Europe had to negotiate a deal whereby the Europeans give up at least two chairs of their nine, and those chairs are transferred to emerging market economies. Only then would a constitutional crisis be avoided. The Europeans had been maneouvered into a corner.
The US - European deal
As a result of a deal struck late last week between European finance ministers and the US Treasury the Europeans will agree to share two of their nine seats on the 24-seat executive board with a leading emerging market government (so, for instance, Belgium will rotate the executive directorship with Turkey, instead of Belgium simply representing Turkey and some other countries on the board).
This was the minimum concession the Europeans thought they could get away with. It is well short of what the Americans initially wanted – Europe to give up four chairs. But the US Treasury found that emerging market governments did not give them the enthusiastic backing that they had expected, because confident that whatever happened in Europe-US negotiations they could only gain. The Treasury for its part had good reason to strike a deal with the Europeans so as to get this looming crisis off the table of the Annual Meeting, where the issue of the US Congress' recent threat to retaliate against China for currency manipulation is likely to prove inflammatory.
Quotas to emerging markets
Still to be decided at the Annual Meeting is the question of the reallocation of quotas (which translate into voting rights). The G20 leaders in September 2009 asked the IMF to shift quota shares "to dynamic emerging markets and developing countries of at least 5 percent from over-represented countries to under-represented countries", to quote from the communiqué. This is a fudge sentence, because some advanced countries are under-represented by the Fund's quota formula and some emerging market economies are over-represented. But however it is interpreted, the bottom line is that European states will loose votes, the emerging market economies will gain, and the US will loose nothing. With their gain, the emerging market economies get increased access to Fund borrowing as well as increased leverage in decision-making.
More power to the IMF Committee?
Another governance issue to be discussed at the Annual Meeting is whether the present International Monetary Fund Committee, composed of ministers representing the 24 seats on the executive board, should be strengthened by giving it – or a smaller and more manageable council of ministers – stronger authority over the managing director than it has at present. The current managing director, Dominique Strauss-Kahn, is known to favour this change. It would enable him to take directions direct from finance ministers and be less constrained by the civil servants on the resident executive board; and would, paradoxically, strengthen his own hand in managing the organization, reducing that of the executive board.
It is likely that the Europeans will manage to extract one important concession (although the pace of change in the negotiations is so fast that one cannot be sure). They are likely to be able to retain the existing gentlemen's agreement with the Americans, whereby they nominate the managing director of the IMF and the Americans nominate the president of the World Bank. True, the governing bodies of the Fund and the Bank in April 2010 called for the heads of both organizations to be selected through an open, non-nationality-restricted search, based on 'merit'. But the Europeans and Americans (backed by the American veto) can always ensure that a European is the most meritorious for the Fund and an American the most meritorious for the Bank. In return the Europeans agree not to press to remove the American veto.
Adjusting to multipolarity
For all the complexities, the larger significance of these developments is that the plates beneath the IMF are changing in delayed response to the rise of multipolarity. The emerging market governments are confident that history is on their side. The Americans are confident that they will not loose. The question for the Europeans is how they can continue to shape the organization even with fewer chairs and lower quotas, by upping their organization and determination.
Europe losing influence in the IMF