Christine Lagarde, managing director of the International Monetary Fund, is a happy woman: her institution will receive at least an extra $430 billion in resources. This will substantially increase the IMF's capacity to help if the eurozone crisis takes a turn for the worse.
Raising such a sum is a big achievement for Ms Lagarde. Yet it is also extraordinary that it should be thought necessary. The role of the IMF has always been to provide foreign currency to countries running out of currency reserves. But the euro is the second of the world’s reserve currencies. That the eurozone needs this money shows how totally dysfunctional it is. Both need and dysfunction underline the case for a transformation of voting weights in the IMF.
More immediately, how should this money be used?
The first part of the answer is: independently. The IMF must reach its own judgements. For this reason, non-eurozone members should decide on whether a programme for any eurozone member makes sense. Recipients cannot set the terms of bailouts, as Jim Flaherty, Canada’s finance minister noted. In this case, it is the eurozone as a whole that is being rescued, not the member in trouble.
The second part is: with tough conditionality for the eurozone itself. In judging whether to support a programme, the IMF always seeks agreement with the relevant monetary and fiscal authorities: the monetary authority is the ECB, and the fiscal authority includes the Commission and other Member States. If the policies being imposed make adjustment by crisis-hit Member States impossible, the IMF must insist on change.
In fact, the programmes now being forced on countries such as Spain are highly likely to fail. By driving economies into recessions and even deflation, they will make their debt burdens worse, not better. The IMF must insist on programmes actually likely to work. If the eurozone cannot ensure that, the IMF should dare to walk away.
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