F the International Monetary Fund did not exist, it would surely have to be invented. Its medicine is often harsh and frequently criticised, but as lender of last resort to countries that temporarily find themselves shut out of financial markets, its purpose is noble and necessary.
In no other field has international co-operation worked as successfully in addressing global problems as it has through the offices of the IMF. The world would undoubtedly be a more chaotic place without it. Just lately, however, its credibility has been endangered as rarely before. Something has gone very badly wrong, and the international consensus on which the organisation is based is fracturing.
The squalid, self-administered nemesis of Dominique Strauss-Kahn, the IMF’s former managing director, plainly hasn’t helped, but in the end that will be no more than a passing blemish that will likely quite soon be forgotten. No – today’s problems run much deeper than sexual scandal. They are to do with the organisation’s slavish support for the euro, a misjudgment that seems destined to test international faith in the IMF to breaking point.
The IMF’s purpose is to instill the “right” economic policies in countries so that they can become competitive, and when things go awry, to provide the stop-gap finance and policies that get them back on their feet. In addressing the European debt crisis, it has veered dangerously from this mission. Support seems directed more at sustaining the single currency than helping individual nations out of their difficulties. This is leading to the now routine prescription of inappropriate policy – repeated rounds of fiscal austerity with none of the compensating support of monetary stimulus and devaluation that countries such as Britain, with their own sovereign currencies, have been able to apply. The IMF has thereby become complicit in making a bad situation much worse.
In a recent analysis of developments in Greece, the IMF virtually admitted as much, describing with eloquence how fiscal austerity had become self-defeating by undermining all hope of economic growth. Yet in defiance of its own evidence, the organisation concluded that the programme remained on track.
Portugal, Spain, Italy, and perhaps eventually France, too, look set to fall victim to exactly the same austerity trap, making it ever harder and more expensive for them to fund themselves in financial markets.
To students of IMF interventions, the inconsistency in approach is glaring. IMF programmes after a serious balance of payments crisis are nearly always made conditional on a sharp devaluation, to help countries return to current account surplus.
This vital element is for obvious reasons entirely missing from the eurozone bail-outs, making it unlikely that they will succeed in returning member states to economic health. Already, international support for future bail-outs is slipping. The United States, by far the IMF’s biggest backer, has made it abundantly clear that it will not be contributing to the $500 billion of extra funding the organisation says it needs to meet the estimated $1 trillion of upcoming demand for bail-outs, much of it from the eurozone.
This has left the IMF in the unusual and problematic position of having to seek the extra finance from bilateral loans, rather than through the normal quota system. Regardless of its loyalties to the European Union, Britain must not allow itself to be drawn into this renewed quagmire of misdirected IMF lending. True enough, no country has ever lost money by lending to the fund. Its position as preferred creditor, and the certain knowledge that countries which fail to repay their IMF loans will be shut out of the international club for generations to come, has made default extremely unusual.
Yet in this case, the IMF is lending to one of the world’s biggest and wealthiest economic regions. The sums involved are consequently much larger. The $30 billion Greek programme alone is already the biggest the IMF has ever conducted. There are surely still bigger ones to come. And while the bail-outs may buy a little time, they do not provide solutions. With devaluation closed off, the eurozone periphery will struggle to return to growth, a key prerequisite in a country’s ability to honour its debts. But never mind the risk of default: it is morally repugnant that relatively poor countries such as India and China are being asked to lend to the IMF to sort out a mess that the eurozone is easily rich enough to clear up itself. There is a sense in which Europe has made its own bed, and now must lie in it. That, in any case, is increasingly the US view, as it progressively turns westwards and inwards.
The bottom line is that an organisation designed to set distressed economies back on the straight and narrow is instead being used to protect both the sanctity of the euro and the single currency’s richer, northern creditor nations from loss. This was surely not what the IMF’s creators had in mind.
Tempting though it is to see the IMF’s commitment to the euro as evidence of a Franco-German takeover, it’s actually less sinister than that. It is to do with fear of the catastrophic consequences of a disorderly break-up. These fears also instruct the Coalition’s policy on further bail-outs.
Yet until there is recognition that the euro under the present framework, not the fiscal profligacy of member states, is in fact the major part of the problem, long-term solutions will remain elusive. Tough love, not more bail-outs, is the appropriate IMF policy for Europe – forcing political leaders to confront reality and the single currency’s northern states to take their losses.