Body
The International Monetary Fund (IMF) needs a managing director to replace Dominique Strauss-Kahn. Reaching a decision will not be as neat and tidy as some of my think-tank colleagues would like it to be. But the process promises to be open with several prominent, plausible candidates, including one from Europe who is expected to be the French finance minister, Christine Lagarde. The issue for the non-European members of the IMF is whether the next managing director will be held hostage to the near-term interests of Europe. The correct answer should be no. The successful candidate must convince the broad membership of the IMF that future decisions with respect to the euro area crises will be made in the interests of the system as a whole—not just those of Europe.
The new IMF managing director will be elected by the executive board by a majority of the votes of each of the 24 executive directors. How might the votes stack up?
The candidate from Europe might reasonably expect to command the votes of the seven executive directors either appointed by EU countries (Germany, France, and the United Kingdom) or elected to represent EU-majority constituencies (currently the executive directors from Belgium, Denmark, Italy, and the Netherlands). They command 31.50 percent of the total voting power. The EU candidate might be able to garner the votes of the Swiss-led constituency, which also includes EU-member Poland, raising the total to 34.28 percent. On the other hand, in the G-20 Seoul agreement to reduce future European representation on the IMF executive board by two seats, the EU representatives swept Switzerland into the mix without its knowledge or consent. The Swiss might hesitate to support the EU candidate for managing director for that reason, even if Switzerland is likely to be heavily impacted by how the ongoing euro area crisis plays out.
The interests of the rest of the membership of the IMF are less aligned with the near-term interests of the leaders of Europe and the euro area in what happens next in the euro area crisis. The direct and indirect economic and financial costs to their economies and financial systems of the crisis, with or without a write-down of Greek, Irish, and Portuguese sovereign debt, are lower. Consequently their appetite for convincing their taxpayers that it is wise to continue on the current Plan A trajectory of muddling through the crisis with enlarged financial support from the IMF is lower. They are more likely to favor a Plan B approach that involves debt reduction and less austerity for the affected countries. Non-European countries also do not want decisions on the scale and conditions associated with future IMF support for the euro area rescue operations made in Frankfurt, Berlin, Paris, Brussels, or Helsinki. In this regard, the leadership of Dominique Strauss-Kahn was already somewhat suspect. He was viewed as tilting toward European interests even as he pressed Europe to act aggressively to stem the crisis. However, Mr. Strauss-Kahn had the advantage of having established his credentials as a voice for the system as a whole before the outbreak of the euro area crisis.
From this perspective, it is unconvincing for European leaders to argue that because about half of IMF's currently committed lending is to members of the European Union, the next IMF managing director again should come from Europe in order to protect the IMF exposure to Europe and promote Europe's near-term interest in its own economic and financial stability. When Michel Camdessus replaced Jacques de Larossière in January 1987, the Europeans did not argue that the managing director should come from Latin America because Latin America was then in the midst of a debt crisis. When Horst Köhler replaced Michel Camdessus in May 2000, the Europeans did not support the Japanese candidate Eisuke Sakakibara, despite the fact that a large portion of the IMF's financial exposure was then to Asian countries. The Europeans need a more-convincing script.
The next managing director of the IMF must command the support of the broad membership of the institution, and not just the votes of European executive directors plus the other members of the G-7. This principle should guide the views of the non-European members of the G-7, in particular the posture of the United States. The votes of executive directors from Europe (34.28 percent) plus those of the executive director from Japan (6.25 percent) and the executive director for the Canadian constituency (3.61 percent), which includes EU-member Ireland, total only 44.14 percent. If the US executive director (16.80 percent) alone joined Europe, there would be a bare majority of 51.08 percent without the rest of the G-7. But the United States would be making a mistake if it were immediately to jump on the European bandwagon with or without Japan and Canada. Such a result would produce a deep crisis of integrity for the IMF.
Instead, the United States should withhold its endorsement of any candidate until that candidate has broad support. In order to obtain that support, the European candidate must convince the non-G-7, non-European IMF members that she or he will address the European crisis by putting the interests of the system as a whole before the interests of the Europe if those interests should diverge as is likely to be the case.
