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26ago10
U.S. gets tough to make Europe yield IMF power
The United States has taken unprecedented action at the International Monetary Fund to try to force Europe to give some of its power on the IMF board to emerging economies.
The United States, frustrated at Europe's refusal to share more power, this month declined to back a resolution that would have maintained European dominance over the 24-member board, diplomats from several IMF members countries told Reuters.
Washington has long pushed, unsuccessfully, to reduce the number of IMF board seats from 24 to 20 as part of broader reforms that would give rising economic powers a bigger say in IMF decisions, reflecting their growing global clout.
Europe has balked at the idea of yielding the nine chairs it currently occupies on the board. Emerging economies like Turkey have expressed interest in a seat on the IMF board.
European countries and the United States dominate the IMF in a reflection of the post-World War II order which is being challenged by the rise of nations such as China.
The board is one of the global lender's main decision-making bodies. It has approved billions of dollars in emergency loans for countries hit by the global financial crisis and oversees the way the Fund is run.
Domenico Lombardi, a former IMF board director, said the U.S. action, at an August 6 meeting of the IMF board, reflected frustrations with Europe not only over Fund governance but on broader economic matters.
Those issues include differences over new liquidity rules for global banks and Europe's emphasis on fiscal austerity while Washington stresses the need to ensure economic recovery before belt tightening.
The United States has not previously flexed its muscles in such an overt way.
"It is an aggressive move generated by a b sense of frustration at what the U.S. sees as a European inability to foster the process of IMF reform," said Lombardi, president of the Oxford Institute for Economic Policy and a senior fellow at the Brookings Institution in Washington.
A senior U.S. Treasury official said the election of the IMF executive board was an opportunity to explore ways to alter its makeup and make it more representative.
"Secretary (Timothy) Geithner supports reforming the IMF executive board to make it better reflect the realities of today's global economy and ensure that the representation of emerging market and developing countries is strengthened," the Treasury official said.
After the surprise U.S. move, the ball is now in Europe's court with discussions likely by European finance ministers at their next regular meeting, officials said.
European Divisions
European officials have suggested they are willing to consider changes to Europe's representation at the IMF but there is no unanimity on how to do it.
Germany, France and Britain each have their own seats. Other European nations like Belgium, the Netherlands, Spain, Italy, Denmark and Switzerland represent a constituency of nations that include many emerging economies.
A spokesman for German Finance Minister Wolfgang Schaeuble said the board should continue to have 24 seats.
A senior European Commission official said it made sense for euro zone members to have a single chair at the IMF, given recent cooperation among euro zone member states to ward off a sovereign debt crisis with a $1 trillion rescue package.
"But for that we need our member states to show commitment and to back our position, otherwise, it will be very difficult. Will it be even more difficult after the American gambit? I don't think so. Will it be easier? I hope so."
African representatives are calling for heads of states to resolve the issue. They worry that Africa's two board seats would be lost if Europe refuses to cede ground.
"The risk is that low-income, poor African countries and some emerging markets will be excluded from the representation," one African official said.
The Group of 20 economic powers is already haggling over how voting power is distributed among Fund member countries, a debate separate to the size and make-up of the board.
As a result of those talks, China could overtake France and Britain, putting it behind the U.S., Japan and Germany.
Lombardi said the U.S. drive to reduce the number of European-held chairs seemed aimed at forcing the hand of larger European countries but would likely mean smaller states such as Belgium and Scandinavian countries have to make way first.
"I would expect the Europeans to put something on the table...perhaps getting rid of one or two chairs, and then a phased plan which foresees a more rational consolidation of European chairs," he added.
"They are going to have to put something on the table in order to sound credible because there is no way they are going to keep the eight or nine chairs if the U.S. doesn't support this resolution," said Lombardi.
"This is a tricky game for the Europeans who would not want to be the ones to sweep the African chairs out of the board because they don't want to cooperate," he added.
[Source: By Lesley Wroughton, Reuters, Washington, 26Aug10]
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