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Wednesday, January 18, 2012

More IMF contributions? conditionality is king

The rumours were finally confirmed today as the IMF released a statement announcing its plans to increase its funding base by up to $500bn. There’s been a lot of talk in the British media in recent weeks about the potential increased UK contributions to the IMF, and not much of it positive. The coverage has painted any additional UK contributions as tantamount to a eurozone bailout – this is a tempting narrative but ultimately it may be too simplistic. When it comes to the IMF there are a few subtleties which need to be considered, as we outline below.

Firstly, no-one has lost money lending to the IMF…ever. It is always the most senior creditor, meaning it will be the first to be paid back. Therefore the potential risk of this lending is minimal, no matter where it goes. Moreover, as Cameron has pointed out, the contributions do not impact the UK’s debt or deficit, so it is not really a question of giving up other priorities to fund the IMF.

Additionally it seems as if the money will be paid into the IMF general reserve fund and not a specific eurozone fund. It is also likely that other members will contribute, so this moves the point away from being simply about the UK and the eurozone and becomes more about the UK's participation in the global economy. Being a member of the IMF is an important part of the UK’s global role and its foreign policy approach. Unilaterally declining to contribute funds and possibly removing the UK from the IMF would have an impact far beyond the UK’s role in the eurozone crisis.

Furthermore, given the failures of the EU in the eurozone crisis, shifting the balance of power towards the IMF would be no bad thing (in the right circumstances, of course). The IMF has conclusively argued for a large write down of debt in Greece (as we also have) and has the expertise and experience to deal with the challenges of restructuring struggling economies.

That said there are a few conditions which the Government should consider:
- The funds must go into a general fund not a eurozone specific one and must be matched proportionately by all other members of the IMF.
- Larger IMF contributions to the eurozone must be matched by a greater say in the crisis resolution. Generally, it should be made clear by the IMF and its members that the current approach is not working – the focus needs to switch to debt restructuring combined with increased competitiveness and growth.
- The funds must not be seen to impact on Cameron’s decision to veto the recent European treaty. Although IMF funding was mentioned, this is a separate issue since it is coming from a direct IMF request not the EU.
So, it comes down to this: The UK should not hand out further contributions to the IMF without conditions. With these conditions met, the result would not be the same as simply handing more money directly to the eurozone. Alas, in the end, even an extra $500bn at the IMF’s disposal may not make a huge difference the outcome of the crisis.

2 comments:

Anonymous said...

Shouldnot the first question be: Does the present IMF-Europe policy work?

Imho clearly not.Nobody can realistically think that in say 5 year eg Italy will have its house in order (zero-deficit (gov.) and export roughly equal to import; debt clearly and structurally on the way back; labor costs internationally competitive. No way.
We are dealing with countries that have a standard of living that is much higher as the economic basics of the resp. countries allow and we give them 5-10 years to get back to something they can afford. And structural problems are hardly adressed.
However realistically whatever we come up with in 2-3 years there simply will not be any money left to finance it no EZ no IMF.
Pace of reform is simply much too slow.

Rollo said...

The IMF should cease contributing to continuing to bail out Eurozone countries while their membership of the Euro continues to blast holes in their hulls. They are bound to sink, unless they get out of the Euro and regain control of their own currencies. Then the IMF might be able to help under strict conditions. The IMF must not follow the ECB in becoming a 'bad bank', taking ownership of a lot of unwanted, unsellable debt. We should contribute nothing more to the IMF until they change course.