The gentlemen's agreement fails Europe too

By: Wolfgang Münchau

After a Frenchman, a German and a Spaniard, it looks as though the next guy is going to be another Frenchman. Or maybe a Brit or an Italian. To us Europeans, the process of selecting the managing director of the International Monetary Fund is indeed transparent. He is always one of us and we rotate. Of course, this approach has long ceased to be in the best interests of the IMF. It is even less in Europe’s own best interest.

For a start, the latest two IMF chiefs have quit prematurely, which is not a good sign. Rodrigo Rato’s announcement that he is leaving for personal reasons follows the departure of Horst Köhler, his predecessor, to become German president. As capable as several of the rumoured European candidates may be, it is not clear whether they could achieve the necessary transition when their predecessors did not.

 

The IMF is changing from an organisation preoccupied with extending credit to countries in difficulty into an institution with a prime focus on global macroeconomic governance. What hinders this process is the IMF’s institutional rigidity. Under a gentlemen’s agreement, a European always runs it. In addition, despite some recent changes, the votes in its executive committee are heavily slanted towards the old industrialised nations. While this was fine for the old IMF, it is no longer appropriate for an institution that seeks a broader mandate for global governance.

A seemingly separate problem is the failure of European countries to pool their representation. In fact, those issues are closely related – because a pooling of European votes, if done correctly, could free up votes for others and provide a fairer representation of newly industrialised and developing countries.

The logical European grouping is not the European Union but the eurozone, given the issues with which the IMF deals. The IMF’s current executive board consists of 24 members. Of the five permanent members, two are from the eurozone – from Germany and France. The remaining 19 vote on an alternate basis. A Belgian alternates with an Austrian and an Italian with a Greek. There are other eurozone representatives who alternate with non-eurozone members. The 13 member states of the eurozone have a combined total voting share of about 23 per cent, while the US has 17 per cent.

These calculations are, of course, based on the voting system currently in place. Since the eurozone does not need, or want, to be more powerful than the US, it would be in a position to reduce its combined share to the same level as the US. This would free up some 6 per cent of the votes to be shared among others.

To an uninitiated observer, it may appear that eurozone interests are massively over-represented already. But that is not true: the Europeans often neutralise each other. Nobody represents the collective interest of the eurozone as a whole, which is more than the sum total of its member states.

Some years ago, in a private conversation, a senior finance official in one of the large member states disdainfully dismissed the idea of pooling as a reduction in his personal influence. Attitudes such as this are the biggest institutional obstacle. It is all about preserving plum jobs for national officials in large international institutions.

Jean Pisani-Ferry, the French economist who is director of Bruegel, the think-tank, argued in a recent article that a broader role for the IMF would be in Europe’s best economic interests. For example, it would be preferable for the IMF to take on the lead role in discussing exchange rate policy with the Chinese authorities – a dialogue that has been hijacked by the US administration.

I was reminded of the eurozone’s lack of global macroeconomic clout when I recently attended a conference of senior Chinese and EU officials. While there was a strong and lively dialogue over foreign policy, trade policy, science and the environment, hardly anybody took an interest in exchange rates or macroeconomic policy in general.

If such a meeting had been held between US and Chinese officials, they would have talked about nothing else. It is true that the Europeans have started a macroeconomic dialogue with China, but this is still relatively low-key.

The problem of Europe’s representation extends to a large number of multinational organisations. The Group of Seven leading industrialised nations includes three eurozone countries. The eurozone dispatches five members to the G10, a grouping that consults on monetary and financial matters.

The issue where a strong European voice is mostly lacking is exchange rate policy. Tonight in Brussels, Nicolas Sarkozy, the French president, will try to raise the issue of exchange rate co-ordination. But the eurozone does not need to manage its exchange rate, as Mr Sarkozy has suggested. What it needs far more urgently is a representative with sufficient authority and credibility to talk about exchange rate policy with non-eurozone countries.

The euro’s influence as an international currency has grown immensely since its launch more than eight years ago. Yet the eurozone seems incapable of organising its interests effectively. The resignation of Mr Rato opens up a new opportunity to rectify this problem. But it looks like we are going to botch this chance yet again.

munchau@eurointelligence.com

© Financial Times Limited 2007

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