Europe and the IMF

Europe has traditionally stood for multilateralism and greatly benefited from a rules-based international economy.  This is at stake now. The multilateral system risks balkanisation if IFIs do not become representative – and fast! My remarks at a recent conference organised by the DIE/GDI, G24, FES and the Bretton Woods Project therefor focused on the stumbling blocks in Europe and Germany toward improved representation at the IMF in particular.

A fact check at the IMF Executive Directors and Voting Power page revealed that at end 2013 the two-thirds of the world population that lives in Asia commands just 20% of IMF voting rights (14% if Japan – which closely follows the US script - is excluded). This results from adding the IMF executive directorates led by Indonesia (3.93), China (3.81), Korea (3.62) and India (2.81). European countries, by contrast, collectively hold about 30 per cent of the votes on the board –so they have an effective blocking minority unless the supermajority threshold is reduced to 70% and below. Europe still runs 9/24 Executive Directors (including Switzerland, so 8 EU and 6 EZ), with each UK, France and Germany having one-country seats by right.

Interpreting democracy to mean one person one vote would suggest that it is this South China Sea-centred part of the world that gets to determine world leadership in global economic governance. Like it or not.

Europa can make room for Asia and gain clout at the Fund nonetheless. A move by the EU to single representation would have the advantage of improving global governance by increasing the involvement and thus the accountability of the emerging economies. Single EU (or euro zone) representation, if set on the same level as for the US (a little under 17 percent at the IMF) would carry more clout than the current sum of EU representatives (around 30 percent).

There have been some attempts by France and Germany to unblock the situation. In 1999, when Lafontaine and Strauss-Kahn were finance ministers, they sought to reduce US weight by combining their memberships in the International Monetary Fund into a single seat to bring more balance to an organization that both described as dominated by the United States. In 2010, Germany tried again and suggested another deal:  The US should give up its veto over important decisions in the International Monetary Fund in return for Europe accepting a smaller say. Currently important decisions require a supermajority of 85 per cent of votes, and the US has a 17 per cent share.

However, many EU governments remain strongly opposed to concrete steps: moving to a single representation would involve redistributing power within the European countries’ group. In particular, the larger countries would need to relinquish, at least on paper, part of the clout they currently wield, in their capacity as G7 members for example, whereas smaller countries who are not G7 members are even more fearful of losing clout to larger countries[1].

Just like for the Eurozone, the polity does not deliver the political solution it needs as countries jealously their national and budget sovereignty: Catch 22, in the words of Ulrike Guerot. A new bestselling book by Bonn University historian Dominic Geppert, insists on Europe´s “real strength”: diversity and democracy[2]. With such a Europe, do not expect too much for more representative IMF governance. It does not “make room”[3].

 What about Germany leading Europe into its ´successful decline´ at the Fund? In contrast to most of the countries in the IMF, Germany makes the central bank and its president, rather than the finance ministry and its minister, its principal national representative at the organization. Any situation in which this prerogative would be diluted could be expected to meet with strong resistance from the Bundesbank. More generally, the navel gazing in recent coalition talks, which were more on Mautgebühren than on  urgent Eurozone requirements point to a bad asymmetry: Europe looks to Germany, but Germany could not seem to care less.

 

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[1] Pier Carlo Padoan, 2008, “Europe and Global Economic Governance”, EU Diplomacy Papers 2/2008, Bruges: College of Europe.

[2] Dominik Geppert, Ein Europa das es nicht gibt, Europa-Verlag, 2013. Translated: „A Europe That Does Not Exist“.

[3] As requested by DGAP director Eberhard Sandschneider in his excellent book „Der Erfolgreiche Abstieg Europas: Heute Macht abgeben, um morgen zu gewinnen“, Hanser, 2011. The title translates into „Europe´s Successful Decline. Relinquish Power Today, Win Tomorrow“.