Download 2005-10-05 EP Hearing final

4 October 2005
Committee on Economics and Monetary Affairs
European Parliament
October 2005
Hearing by Lorenzo Bini Smaghi
I. Introduction
Madam Chair, honourable Committee Members,
I would first like to thank Chairwoman Pervenche Berès for giving me the opportunity
to share some thoughts on the strategic review of the International Monetary Fund
(IMF).
The IMF, with its nearly universal membership of 184 countries and its cooperative
structure, is a unique international institution to promote global macroeconomic and
financial stability and to address related economic challenges. It is in the interest of
Europe to ensure that the IMF is a well-functioning institution with full legitimacy.
As you know, the strategic review of the IMF covers a broad range of issues,
including its role in surveillance, in providing technical and financial assistance to
vulnerable member countries, and its governance.
I would like to focus today on the governance of the IMF. Before I turn to the issue at
hand, I would like to note that I speak here today in a personal capacity.
I would also like to point out that the IMF is a country-based institution. It is,
therefore, primarily a matter for EU countries to decide on how to improve IMF
governance and how they want to be represented in the IMF.
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In addressing the issue of the European representation, three areas are of particular
relevance: (i) the rising global challenges to IMF representation and governance;
(ii) the EU rationale and interest to reform its representation; (iii) the options for
reform to strengthen EU cooperation and to increase the EU’s influence. I will
conclude with an overall personal assessment.
II. Global challenges to IMF representation and governance
To start with, it is important to recall that the IMF is a cooperative institution, which
aims at promoting macroeconomic stability and preventing and resolving financial
crises. To fulfil its mandate, the IMF performs three main functions: surveillance,
lending, and technical assistance.
The IMF’s resources are provided by its member countries, primarily through the
payment of quotas, which determine countries’ voting shares. These quotas are
currently calculated on the basis of four criteria: (i) GDP, (ii) foreign exchange
reserves, (iii) the degree of openness of the economies and (iv) the variability of trade
and capital flows of member countries. This formula is intended to capture countries’
relative importance in the world economy, as well as their vulnerability to external
shocks.
The 184 countries that are member of the IMF are represented in the Executive Board
by 24 Executive Directors. Most countries are grouped in constituencies (Table 1).
Decisions are taken in the Executive Board according to three majority systems,
depending on the issues under consideration, 50%, 70% and 85% of total votes. Very
seldom a formal vote is taken as decisions are made by consensus.
Over the last few years, the IMF governance has become an issue of discussion. At
the last Annual Meetings of the IMF, a few days ago, the Fund’s Managing Director
stated that governance has become subject to major imbalance. Three factors are
behind these developments:
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1. Quota and voting share calculations:
The current voting shares of some member countries do not reflect their relative
importance in the world economy (see Table 2 for a comparison of voting share
and quota share). This is mostly true for some countries in emerging Asia, which
request a significantly higher quota in light of their recent rapid growth, expanding
trade and rising foreign exchange reserves. Moreover, the gap is expected to rise
over time if the recent trends continue in the future. Just to give an example, the
share in world GDP of China, which is already under-represented, is expected to
double in 10 – 15 years. Over the same period, the EU’s share is projected to
decrease by one third (see Table 2 for projections of countries shares in the world
economy in 2020).
Within Europe, based on the current formulas, there is a balance between underrepresented and over-represented countries. On the basis of the current formula,
Europe as a whole does not seem to be over-represented.
The formula currently used to calculate quotas is considered by many as not
anymore relevant to measure countries’ relative importance in the current
economic and financial environment. In particular, the emphasis on the stock of
foreign exchange reserves or on the degree of trade openness are considered not to
take the increasing importance of capital flows in international payments duly into
account.
2. Influence:
Another issue that has emerged in IMF and WB governance arises from the fact
that in recent years some members of the Fund do not feel that they have enough
voice to represent their problems and interests. This is the case in particular for
African countries in spite of the fact that the IMF is deeply engaged in Africa
(95% of the IMF programmes concern low-income countries). While Africa is not
under-represented on the quota formulas, only two Executive Directors have to
represent over 40 countries. There are also calls for a change in the actual
organisation of the Executive Board. Some constituencies, especially the Asian,
feel that they should have a stronger voice.
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3. Effectiveness:
The governance of the IMF is felt by some as not ensuring full effectiveness. The
IMF’s role in the resolution of recent financial crises has led its members,
especially creditors, to increase their scrutiny of the decision making process. As a
result, the IMF has been criticized as being ineffective, because of the large size of
its Executive Board and the slowness of its financial support to countries
experiencing financial crisis.
These problems are not new. In the past, the number of EDs has been increased to
meet the concerns of under representation. Quota misalignments have been corrected
with ad hoc quota changes. Some countries, in particular Europeans, have indicated
that these traditional recipes, i.e. ad hoc quota increase, increase in basic votes and
possibly increase in the number of Executive Directors, could be used again to
address the most recent problems.
It’s important to realise that the solutions that have been followed in the past may not
be viable anymore. For instance, ad hoc increases to adjust the quotas of some underrepresented countries reduce equiproportionally the quotas of all other countries,
including those that are under-represented. The increase in basic votes, also, tend to
reduce the quotas of the larger shareholders. Several countries, in particular the US,
Japan and other Asians have indicated that these solutions cannot be repeated in the
future.
There have also been various attempts to change the quota formulas in order to take
into account changes in the world economy, but so far it has been impossible to reach
agreement on these issues (see Table 2 for countries’ shares in the world economy).
To sum up, there are many issues at stake for the IMF governance. At the IMF Annual
Meetings a few days ago, the issue of quotas and representation was raised on several
occasions. This discussion will continue towards next year’s Annual Meetings in
Singapore. Moreover, the IMF’s 13th quota review provides an opportunity to address
the issue of quotas and representation.
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III. Europe’s rationale and interest for reform
It is in Europe’s interest that the IMF preserves its legitimacy and remains at the
center of the international financial system. It is also in its interest to preserve and
strengthen its overall influence in the IMF.
Europe has also to realise that most other countries and constituencies outside Europe,
in particular the US, Japan, Asia, consider that part of the solution for the IMF’s
governance lies in a redefinition of Europe’s role and way in which it is represented.
Although Europeans do not necessarily need to share this broad consensus outside
Europe, it is important to try to understand the reasons for this.
As a matter of fact, when EU countries do coordinate and cooperate, the outcome can
be powerful and the EU’s voice is highly influential. A coalition of European
constituencies represents one of the larger coalitions, with over 30 per cent of the
votes, more than the G11, or the US. The more EU countries coordinate and act as a
coalition, the more the rest of the world considers them as a single entity. And this is
why they consider their 8 chairs and over 30 per cent of the votes as excessive.
Given these challenges, we should ask how the EU could contribute to find a solution
with a view to maximize its interests while at the same time preserving the legitimacy
of the IMF.
A. Current settings of EU coordination on IMF issues
EU countries indeed coordinate their positions on IMF issues, as decided in the
Copenhagen ECOFIN meeting in 2002. There are two main fora through which this
coordination takes place. In Europe, EU countries coordinate in the EFC and the
EFC’s Sub-Committee on IMF and Related Issues (SCIMF). In Washington, the
Executive Directors representing EU countries at the IMF get together regularly in the
so-called EURIMF. The EFC concentrates more on long-term policy issues relevant
for the EU, while the EURIMF is a forum for ongoing exchange of information and
coordination. Its agenda follows closely the agenda of the IMF Executive Board.
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This model has been effective in fostering common views on issues such as private
sector involvement in crisis prevention and resolution, access limits to IMF resources,
IMF conditionality, etc.
On other areas where the EU has common interests such as trade, financial sector
issues, development aid, there is some coordination. For example, the EU Presidency
always holds a speech at the IMFC meetings and this speech is agreed among EU
countries. At the latest IMFC meeting a few weeks ago, the EU Presidency speech
included, for instance, a commonly agreed text on debt relief and development
finance.
While EU countries coordinate among themselves, it is fair to say that their overall
influence on IMF decisions does not correspond to their overall voting share. This is a
well-agreed fact, although not everybody agrees on the reason for this underinfluence. One hypothesis, which might not be shared by others, is that a source of
weakness derives from the fact that the European countries are spread over ten
constituencies. Euro area countries are spread over eight constituencies. In three of
these, non-EU countries preside the constituency.
What is important to recognize is that decision-making in the IMF requires the
building of coalitions between constituencies, in order to achieve the desired majority
of votes (even if in the end decisions are taken by consensus). Several groupings have
been created. One example is the G7, which groups the seven largest industrial
countries and holds nearly 50 percent of the votes. Another grouping is the G11,
which consists of emerging market economies and has around 30 percent of the votes.
In none of these groupings do all EU or euro area countries participate.
On issues that are of relevance to monetary union, the euro area has a clear decision
making process and a clear representation to express common positions. However, the
euro area is not yet always fully represented when such issues are discussed at the
IMF, as the Eurogroup does not always have a joint position. For example, there is no
single euro area statement at the IMF Executive Board meeting on the World
Economic Outlook.
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B. Options
Reform of IMF governance entails several aspects, in particular, the issue of quotas
and shares and that of representation. The two are not necessarily linked, except for
one aspect. Concerning quotas and shares, long-term trends in growth rates will
inevitably lead to a progressive reduction in most EU countries’ quotas. This is
unavoidable if quotas have to reflect the relative size in the world economy.
According to some calculations, by 2020 the GDP of developing Asia (excluding
Japan) could be as large as that of the current euro area countries. At present, it is less
than half. These trends will have somehow to be reflected in the calculation of the
IMF’s quotas and shares.
How can EU’s influence be maintained or even increased if over time its quota is
bound to decrease?
One way to maintain or strengthen influence as the relative shares decrease could be
to strengthen coordination between EU or euro area constituencies. There are different
ways to achieve this.
As a benchmark, it may be useful to examine the extreme case of a single chair of the
European Union, as a long-term solution to EU representation. I called it a benchmark
because this solution has not been endorsed by EU countries. This option has the
following features:
-
It would consolidate the EU Member States’ voting share by regrouping all
Member States into one constituency;
-
The EU would have to speak with a single voice, in line with developments in
the foreign policy area, and would mirror the draft constitutional Treaty’s aim
to streamline the EU’s representation in international fora;
A sub-option would be to form a single constituency of euro area countries only. Like
the first option, this would reduce the size of the Executive Board, while regrouping
euro area countries.
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C. Possible challenges for a unified European representation
Regrouping EU countries in one constituency would be challenging.
-
First, it requires an amendment of the Articles of Agreement and hence an
85% majority vote by the Board of Governors. The EU would obtain a veto
power even, with a lower overall quota share than the sum of the current
shares. This could create some room to meet demands from emerging
markets and developing countries for enhanced representation and to address
the problem of quota shares.
-
Second, there is the fear that a single European chair may create a risk of
polarisation in the IMF Board between developed economies, on the one
hand, and emerging market and developing economies, on the other hand.
However, a careful analysis of the current situation shows that the IMF is
much more polarized at present, the G7 having a major influence on
decisions taken by the Executive Board. In the G7, the US have a major role
as they are the only country which can from alternative coalitions, either
with the other G7 countries or with the G11 countries. No European country
can have such a role, unless the EU countries unite.
-
Third, a single EU seat would eliminate mixed constituencies, where the
views of creditor and debtor countries are tentatively balanced. IMF
experience suggests in any case that when divergence of views emerge
between debtors and creditors, these give rise to direct negotiations, in
particular between the G7 and the G11.
-
Fourth, a single seat would imply a single position on all issues. This would
require parallel progress in the implementation of an EU foreign policy. EU
countries would need to design clear rules to ensure effective decisionmaking. As most IMF issues fall under the competence of the Member
States, there would also be a need for mechanisms to ensure political
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accountability. There would be a need to clarify the roles that the national
parliaments and the European Parliament would be expected to play.
-
Fifth, a single seat would not eliminate the need for creating coalitions with
other countries or constituencies to ensure that sufficient guidance is given
to the IMF management. In such coalition-building, however, EU countries,
speaking with one voice and acting jointly, would have a major leadership
role.
To sum up, a single EU or euro area seat would be quite a challenging endeavour. It
would certainly call for a step forward towards political unification.
V. Overall assessment
EU countries face the issue of IMF governance in a rather peculiar and paradoxical
situation. They see themselves as under-influential, as the IMF is largely influenced
by the US. On the other hand, the non-Europeans see EU countries as coordinating
more and more and acting jointly, and they consider 8 or more seats as excessive.
Pressure to reform the IMF governance and representation will intensify going
forward, mainly at the initiative of non-Europeans. The governance of the IMF is
bound to be discussed also in many other fora, like the G20. Unless this problem is
satisfactorily solved, the IMF may lose its legitimacy and be replaced by other fora.
This is not in the interest of EU countries.
EU countries do not have yet a common position.
A EU/euro area single seat
appears to be a desirable solution, but only in the long term, and in parallel with
progress in other areas of political integration. For the short to medium term, it is
essential to further improve coordination and cooperation on IMF issues, so as to
maximise the EU influence.
The risk that I see, personally, is that in the coming discussions on reforming IMF
Governance Europe is isolated and divided, defending rearguard positions, not being
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able to agree on a common proposal. Time, as well as demographic and growth
trends, play against Europe.
I personally believe that the EU and EU countries can gain significantly from a reform
of IMF governance, which can at the same time secure EU countries’ interest,
strengthen EU cohesion as well as the influence of our continent in the global
economy, while serving the interest of other IMF members.
To achieve this, leadership is needed.
Madam Chair, honourable Committee Members, I thank you for your attention.
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Table 1: Constituencies’ voting shares and EU countries (shaded) in the IMF
Executive Board
Constituencies
1
2
3
4
Voting share (%)
17.08
6.13
5.99
5.13
5
6
7
4.95
4.95
4.85
8
4.27
9
4.18
10
3.71
11
3.51
12
3.33
13
3.26
14
15
3.22
3.19
16
3.00
17
18
2.94
2.84
19
20
2.74
2.47
21
2.47
22
23
24
2.40
1.99
1.41
Executive director
Alternate director
US
Japan
Germany
Belgium
Austria
Belarus
Luxembourg
France
UK
Netherlands
Ukraine
Armenia
Cyprus
Moldova
Mexico
Venezuela
Costa Rica
Nicaragua
Italy
Greece
Albania
Timor-Leste
Canada
Ireland
Antigua
Dominica
St. Lucia
Norway
Sweden
Denmark
Latvia
South Korea
Australia
Kiribati
New Zealand
Samoa
Egypt
Bahrain
Lebanon
Qatar
Saudi Arabia
Malaysia
Indonesia
Brunei
Myanmar
Tonga
Tanzania
Kenya
Angola
Ethiopia
Mozambique
South Africa
Zambia
China
Switzerland
Poland
Azerbaijan
Turkmenistan
Russia
Iran
Morocco
Afghanistan
Tunisia
Brazil
Colombia
Dominican Rep.
Panama
India
Sri Lanka
Bangladesh
Argentina
Peru
Bolivia
Equatorial Guinea
Rwanda
Benin
C.A.R.
Congo, R.
Guinea
Mauritania
Senegal
Czech Rep.
Slovak Rep.
Hungary
Slovenia
Kazakhstan
Turkey
Bosnia
Georgia
Romania
El Salvador
Spain
Malta
Bulgaria
Israel
Croatia
Macedonia
Guatemala
Honduras
Portugal
San Marino
Bahamas
Grenada
St. Vincent
Estonia
Lithuania
Marshall Isl.
Palau
Seychelles
Iraq
Libya
Syrian
Barbados
Jamaica
Belize
St. Kitts
Finland
Iceland
Micronesia,
Papua N.G.
Solomon Isl.
Jordan
Maldives
UAE
Mongolia
Philippines
Vanuatu
Kuwait
Oman
Yemen
Cambodia
Nepal
Vietnam
Botswana
Gambia
Namibia
Sudan
Fiji
Singapore
Tonga
Burundi
Lesotho
Nigeria
Swaziland
Lao
Thailand
Kyrgyz Rep.
Uzbekistan
Serbia
Tajikistan
Algeria
Ghana
Pakistan
Ecuador
Suriname
Bhutan
Chile
Burkina Faso
Chad
Côte d'Ivoire
Guinea-Bissau
Mauritius
Togo
Guyana
Trinidad
Haiti
Paraguay
Cameroon
Comoros
Djibouti
Madagascar
Niger
Uruguay
Cape Verde
Congo, D. R.
Gabon
Mali
São Tomé
Eritrea
Malawi
Sierra Leone
Uganda
Source: IMF (some countries' names shortened due to limited space)
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Table 2: Voting and quota shares at the IMF and shares in the world economy of
selected IMF members
Share at the IMF
Share in World economy
Current voting
share (1999)
Voting share
(proj 2020)
Cooper
Formula
Germany
6.0
6.3
8.0
7.0
France
5.0
4.1
5.1
4.4
United Kingdom
5.0
5.4
3.9
Italy
3.3
3.1
Netherlands
2.4
Belgium
Existing formulas Excluding intra(updated 2002)
EU trade
Trade share
(exports 2002)
PPP GDP share
(2002)
GDP share
(2002)
GDP share
(proj 2020)
6.0
9.8
4.4
6.7
3.8
3.7
4.9
3.1
5.0
3.2
5.7
3.4
4.4
3.1
5.3
4.1
4.0
3.4
2.9
4.0
3.0
4.1
2.3
2.5
1.4
2.8
1.3
3.3
0.9
1.4
0.8
2.1
1.7
1.3
2.0
0.8
2.7
0.6
0.8
0.6
Spain
1.4
2.0
1.9
2.0
1.4
2.0
1.8
2.4
1.8
Sweden
1.1
1.1
0.9
1.2
0.8
1.3
0.5
0.8
0.6
Austria
0.9
1.0
0.8
1.1
0.6
1.2
0.5
0.7
0.5
Denmark
0.8
0.9
0.6
1.0
0.5
0.9
0.3
0.6
0.4
Poland
0.6
0.6
0.4
0.6
0.3
0.7
0.8
0.6
0.6
Finland
0.6
0.5
0.5
0.5
0.4
0.7
0.3
0.4
0.4
Hungary
0.5
0.4
0.2
0.4
0.2
0.6
0.3
0.2
0.2
Portugal
0.4
0.5
0.4
0.5
0.3
0.7
0.4
0.4
0.2
Ireland
0.4
1.4
0.2
1.7
0.3
1.3
0.3
0.4
0.5
Greece
0.4
0.4
0.3
0.4
0.3
0.2
0.4
0.5
0.5
Czech Rep.
0.4
0.4
0.3
0.5
0.1
0.6
0.3
0.3
0.2
Slovak Rep.
0.2
0.2
0.1
0.2
0.1
0.2
0.1
0.1
0.1
Luxembourg
0.1
1.1
0.1
1.8
0.1
0.2
0.1
0.1
0.1
Slovenia
0.1
0.1
0.1
0.1
0.1
0.2
0.1
0.1
0.1
Lithuania
0.1
0.1
0.1
0.1
0.0
0.1
0.1
0.1
0.1
Cyprus
0.1
0.1
0.0
0.1
0.0
0.0
0.0
0.0
0.0
Latvia
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.1
Malta
0.1
0.1
0.0
0.1
0.0
0.0
0.0
0.0
0.0
Estonia
Aggregate
Euro Area (12)
0.0
32.0
23.0
0.1
33.7
24.4
0.0
30.9
24.1
0.1
37.7
27.7
0.0
23.4
17.9
0.1
40.1
31.0
0.0
21.3
15.5
0.0
31.1
23.0
0.0
21.1
14.5
United States
17.1
21.3
22.5
17.8
19.3
10.8
21.0
29.3
32.0
Japan
6.2
7.0
13.2
7.3
6.9
6.3
6.8
11.5
8.4
Canada
2.9
2.8
2.9
3.2
3.3
4.2
1.9
2.4
2.1
Switzerland
1.6
1.4
1.0
1.6
1.8
1.4
0.4
0.9
0.5
Australia
1.5
1.1
1.3
1.1
1.7
1.0
1.1
1.5
1.2
Norway
0.8
0.7
0.7
0.8
0.9
0.9
0.3
0.6
0.5
Israel
0.4
0.5
0.3
0.6
0.5
0.4
0.3
0.3
0.3
New Zealand
0.4
0.2
0.2
0.2
0.5
0.2
0.2
0.2
0.2
Iceland
Aggregate
0.1
31.1
0.0
35.1
0.0
42.0
0.0
32.6
0.1
35.0
0.0
25.2
0.0
32.0
0.0
46.8
0.0
45.1
Saudi Arabia
3.2
0.8
1.1
1.0
3.6
1.1
0.5
0.6
0.7
China
2.9
7.2
1.8
4.6
3.3
5.2
13.4
4.4
11.1
Russia
2.8
1.4
2.0
1.3
3.1
1.7
2.6
1.4
1.8
India
1.9
1.6
1.0
1.0
2.2
0.8
5.8
1.6
2.6
Brazil
1.4
1.1
1.9
1.0
1.6
1.0
2.7
1.4
1.3
Venezuela
1.2
0.4
0.6
0.4
1.4
0.4
0.2
0.3
0.2
Mexico
1.2
1.9
1.7
1.9
1.4
1.6
1.8
1.7
1.8
Argentina
1.0
0.4
0.9
0.4
1.1
0.4
0.8
0.4
0.3
Indonesia
1.0
0.7
0.8
0.8
1.1
0.9
1.4
0.6
0.7
Korea
0.8
2.1
1.4
2.1
0.9
2.6
1.7
1.7
2.1
Malaysia
0.7
1.0
0.5
1.3
0.8
1.5
0.5
0.3
0.4
Thailand
0.5
0.8
0.5
0.9
0.6
1.0
0.9
0.4
0.6
Turkey
0.5
0.8
0.6
0.7
0.5
0.6
0.9
0.8
1.0
Singapore
0.4
1.9
0.5
2.9
0.5
2.2
0.2
0.3
0.3
Chile
0.4
0.3
0.2
0.3
0.5
0.3
0.3
0.2
0.3
Colombia
Aggregate
0.4
20.3
0.2
22.5
0.2
15.5
0.2
20.8
0.4
22.9
0.2
21.5
0.6
34.4
0.2
16.2
0.3
25.5
Developing countries (134)
Aggregate
16.7
8.8
11.6
8.9
18.8
13.2
12.3
6.0
8.3
EU (25)
Advanced economies (9)
Non-EU
Emerging Markets (16)
12