Euro crisis could make IMF bigger and softer

January 10, 2012

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own

Europe’s travails are an opportunity for the International Monetary Fund. With a kitty approaching $1 trillion, the fund will need to get even heftier in 2012 if the euro zone crisis takes a turn for the worse. And the long-inflexible “conditionality” attached to its loans may have to soften if big countries like Italy or Spain are forced to borrow. Some U.S. republican senators are balking at this bigger, easier IMF. But it looks preferable to the recent trend that saw nations build up their currency reserves.

As the world’s leading financial firefighter, the fund trebled in size following the 2008 meltdown. And 2012 should be another banner year. Euro zone members have already pledged an extra 150 billion euros ($190 billion) to the fund. More money could flow in from developing nations.

Aside from this expansion, the debt crisis will likely reshape the IMF in other ways too. It was already moving away from its traditional tough line under Dominique Strauss-Kahn, the fund’s director during the 2008 financial crisis. But the global nature of the crisis, the major risk of a new recession, will make it more sensitive to the risks of prolonged austerity.

The days of what was called the “Washington consensus” are numbered, and the trend can only accelerate with the slow shift of the IMF’s balance of power. As big developing nations like China or Brazil are asked to chip in, they rightly demand more say in the fund’s policies.

All these prospects alarm some Republican senators, who are trying to withdraw a $108 billion U.S. credit line to the IMF. The concerns are that a softer IMF could encourage reckless behavior by nations. But cutting funding to the institution may also be self-defeating: shrinking U.S. contributions could mean diminishing influence in the fund.

There are real benefits to a bigger, kinder fund. The IMF’s reputation fostered a determination among developing nations to self-insure against crisis by building up vast foreign exchange reserves. Though good in moderation, this has been taken to extreme. Global foreign exchange reserves are now 60 times higher than in 1990, according to a University of Virginia study, against an 18-fold rise in IMF lending power. Such massive reserve accumulation has exacerbated global imbalances – ironically the very problem the IMF was originally created to correct.

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