By Ambrose Evans-Pritchard* – The Telegraph
If the Europeans persist in treating the International Monetary Fund as a hereditary fiefdom, they will destroy the institution. Global credibility will wither away.
Asians will take matters into their own hands. They will create a parallel monetary structure anchored on a Sino-centric financial system, with support from such ‘BRICS’ nations as Brazil, India, and South Africa. It will be fundamentally at odds with the western liberal order.
Yet that is exactly what the EU aims to do as Christine Lagarde steps down as the IMF’s managing-director after eight years to take charge of the European Central Bank. France and Spain say the new chief must be European, the twelfth in a row since 1946.
Germany’s Angela Merkel has abandoned pious vows in Davos to open up the multilateral institutions to China and India before they defect to “new institutions”. Now she is asserting a “European claim” to the IMF.
The anachronistic stitch-up – where Europe always gets the IMF while the US always gets the World Bank – is to be kept alive a decade after the G20 summit in London said it should never happen again. The top financial slots were to be picked by “an open, transparent and merit-based selection process” in the future.
In the ten years since the Europeans have further abused their control of IMF. They hijacked the Fund to rescue monetary union at a time when the eurozone had no lender-of-last resort – due its own recklessness and political paralysis – and had therefore exposed a string of sovereign states to bankruptcy.
The eurozone bail-outs consumed 80pc of total IMF lending between 2011 and 2014 even though the currency bloc had ample means to look after itself, and indeed had a lower collective debt ratio than in the US, the UK and Japan. Greece, Ireland, and Portugal were each allowed to borrow 2,000pc of their quotas, triple the normal limit. Poor African states were in effect being forced to bail out much richer states in Europe.
No such largesse had been available to Asian and Latin American countries when they ran into trouble. The Fund mishandled the East Asia crisis in 1998, enforcing a one-size-fits-all regime of harsh fiscal austerity that went beyond the therapeutic dose and violated economic science.
The legacy of that episode was poisonous. Asia’s rising powers concluded that the IMF was stacked against them, as indeed it is. Europeans control a third of the votes. China has 6.09pc. India has 2.64pc, less than Benelux. Brazil has 2.2pc.
The Class of 98 turned to “self-insurance” so that they would never again find themselves at the Fund’s mercy. They built up foreign reserves on such a scale that it led to the ‘Asian savings glut’. Excess capital held down bond rates. This fed a worldwide search for yield that incubated the subprime and Club Med asset bubbles, and is a key reason why the global financial system remains so badly out of kilter today.
The Fund breached its own charter in the first Greek bail-out of 2010: it lent large sums to a country that was already insolvent and needed debt-restructuring instead.
Leaked minutes show that the Brazilian and Indian members of the IMF board protested at the time, deeming it a rescue for the euro project and European banks, not a rescue for Greece. The Fund had no mandate to do this. Its mission is to save countries, not currencies and creditors.
Every non-European member voted against this overreach. The US acquiesced from fear of a ‘Lehman II’ and broad contagion.
The result was a cruel hoax against the Greek people. More debt was piled on the bankrupt Greek state while foreign banks and funds were able to offload positions at minimal loss. Greece must generate a fat primary surplus for decades to come to pay off creditors, not so different from German war reparations at Versailles.
The country was denied the routine IMF medicine practiced all over the world: fiscal austerity, offset by debt relief and devaluation. It received only austerity, taken to extremes.
This pushed the Greek economy into a violent downward spiral, culminating in six years of depression, a 26pc fall in GDP, and 60pc youth unemployment. This was self-defeating even on its own crude terms. Debt ratios rose even faster, requiring further ‘rescues’.
The IMF should have washed its hands of this policy crime from the outset. But it didn’t. It had become a tool of the eurozone political elites under Dominique Strauss-Kahn and Christian Lagarde – both former French finance ministers.
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Mrs Lagarde’s first in-house mea culpa on the EMU crisis was a whitewash. The board ordered an outside inquiry by the Independent Evaluation Officebeyond her control. This rendered an acid verdict on the Fund’s culture of “culture of complacency”, “groupthink”, and its “superficial and mechanistic” analysis.
The investigators were unable to crack secretive “ad-hoc task forces”, or obtain key records, or determine who has been running this immensely powerful body with a $1 trillion war chest and a licence to turn nations upside down. It found the management had deceived the board.
“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located,” it said. This had the hallmarks of a systemic management breakdown.
The probe said IMF staff became cheerleaders for euro. Those inside the Fund who warned about the inherent dangers of a half-built currency without a treasury to back it up were told to shut up. “After a heated internal debate, the view supportive of what was perceived to be Europe’s political project ultimately prevailed,” it said.
The IMF had no fall-back plan for a systemic EMU crisis because it had ruled out any chance that one could happen. “The possibility of a balance of payments crisis in a monetary union was thought to be all but non-existent,” it said.
At root was a failure to grasp an elemental point: that currency unions with no joint treasury are inherently vulnerable to debt crises. States facing a shock no longer have sovereign tools to defend themselves. Devaluation risk is switched into bankruptcy risk.
To my knowledge, nobody has ever been held to account for these failings, some of which occurred on Mrs Lagarde’s watch. The IMF operates outside any normal chain of accountability – like the EU institutions of course.
Mrs Lagarde is not an economist. She is a political lawyer to her finger-tips. This means the ECB is likely to continue operating in a gray zone under her control as the gendarme for the eurozone political objectives rather than as a conventional central bank.
Methods can be brutal. As one former governor told me; “they threaten governments that misbehave with financial destruction. They cut off refinancing and threaten to kill the banking system. They create a roll-over crisis in the bond market.”
It is what happened to Italy in 2011. The ECB ordered sweeping changes in Italian domestic law in a secret letter. When the Berlusconi government balked, the ECB forced him out of office by switching bond purchases on and off (the “spread game”). In 2015 it brought Greece’s Syriza rebels to heel by cutting off funding to private Greek banks.
This smacks of central bank tyranny, although few in the European political firmament seem bothered – which is itself revealing: the project justifies all means. It is the ideological milieu of Mrs Lagarde. My guess is that she will prove just as ruthless as her ECB predecessors in the use of these dark arts.
As for the IMF, the front-runner emerging from the G7 in Chantilly this week with the backing of Germany and France is Jeroen Dijsselbloem, ex-Eurogroup chief and the point man for the fiscal waterboarding of Greece.
What about the rest of the world: India’s Raghuram Rajan, or bond king Mohamed El-Erian from Egypt, or Singapore’s Tharman Shanmugaratnam, or Korea’s Hyun Song Shin?
Washington could put a stop to this European feudalism instantly by withholding its votes. But Donald Trump has chosen to play the game too, demanding his man David Malpass for the World Bank. The US is again complicit.
So we face the prospect of Mr Dijsselbloem, a Dutch agricultural economist, who rose to high European office only because he served as the compliant enforcer of austerity for the German finance ministry in the dark years. The sole reason to pick him now is that he will again subordinate the IMF to the needs of the European project when it next gets into trouble.
How long before we start hearing about the Asian Monetary Fund?
*Ambrose Evans-Pritchard is International Business Editor of The Daily Telegraph. He has covered world politics and economics for 30 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels.