The IMF mus full out of the Troika if it wants to survive

The IMF must pull out of the troika if it wants to survive

Financial Times (UK).   [Commentary].   Ousmène Mandeng   18/04/2013.            

COMMENT

There are many victims of the eurozone crisis but one loser is seldom mentioned: the IMF has suffered considerable collateral damage. It has been dragged along in an unprecedented set-up as a junior partner within Europe, used as a cover for the continent's policy makers and its independence lost.

The monetary fund was set up as a technocratic institution . That, indeed, is why it was brought into Europe: it was felt that a neutral broker was needed to fix the eurozone's problems. It is an outsider that would seem less biased in its assessments of peripheral eurozone countries than, say, the chancellor of Germany or the president of the European Commission. While the distribution of voting power within the IMF has been controversial for some time, it is a consensus-driven body. Its independence from any one region or power has provided the basis for efficient decision-making - and is essential to it.

So the fact that decisions about IMF-supported adjustment programmes are seemingly being taken in Berlin, Frankfurt and Brussels should horrify its members. The commission and the European Central Bank are not even members of the IMF yet they seem to be running the show. Together with the IMF, they are the troika running the continent's rescues. Being part of this approach means political meddling has been institutionalised. The approach to the eurozone crisis also undermines the long-running efforts to reform the governance of the IMF, which were, after all, intended to reduce the disproportionate influence of western European governments.

This is hardly the first time that the IMF has been seen to be unduly influenced by its largest shareholders. During the Latin American and Asian crises it was said that the US Treasury department was never far away from the negotiation table. But it is new that key IMF programme decisions are being taken outside the fund. The interests of other eurozone countries or institutions dominate proceedings unduly, so it is often unclear whether the interests of the IMF, the global economy, the eurozone or individual countries are being protected by its work.

The mishandled Cyprus bailout affirmed the deficiencies of the crisis-resolution approach in the eurozone. The poor record of adjustment effectiveness has undermined confidence in the IMF; troika adjustment programmes have been guided often by the needs of neighbouring European governments rather than global economic considerations. It would surely already have walked away from Greece had it not been held back by political inconvenience.

The eurozone has further undermined the IMF by setting up its own crisis resolution institution. The European Stability Mechanism is for all practical purposes a European monetary fund. Proposals for an Asian monetary fund during the Asian crisis were attacked with good reason: there was real concern that a regional fund would reduce the effectiveness of multilateral co-operation. These concerns seem to have been forgotten.

The risk of a fragmentation of international co-operation is considerable. It is not hard to imagine a scenario where a country has suffered a considerable economic shock and requires significant financial resources to avoid a painful and disruptive adjustment - say a large debt restructuring. In such circumstances, the interests of that nation, the world and neighbouring countries might not be aligned. That is why a multilateral approach is more likely to be effective.

The fund cannot be seen as neutral and at the same time serve the immediate interests of the eurozone. This is not saying that a trustworthy IMF would be able to rescue the world economy overnight. It would not - and it has made mistakes in the past. But the eurozone debacle risks destroying the credibility of the IMF - and therefore the foundations for multilateral economic co-operation.

The IMF's potential effectiveness has suffered and countries may be less willing to seek assistance from the fund, possibly prolonging future economic pain. This will come to matter a great deal if a larger eurozone country should come to require its help. To save itself, the IMF needs to leave the troika.

The writer is a former deputy division chief at the IMF