INTERNATIONAL

Spring 2006

by Fritz Fischer

If EU countries could only get their act together, Europe could become a genuine counterweight to the US in the running of the Washington-based IMF and World Bank. Fritz Fischer a former German Executive Director of the World Bank, explains how such a reform initiative could be structured

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The Bretton Woods Institutions – the International Monetary Fund (IMF) and the World Bank – are powerful organisations whose potential capital base exceeds $500bn. In contrast to the United Nations with its principle of “one country, one vote”, the Fund and Bank (which have identical memberships) have a system of weighted voting, determined largely by economic size. This, of course, affords the industrialised donor countries a majority. The two Boards of Governors are the highest authority and usually convene yearly during their joint autumn meetings. Day-to-day decisions are delegated to the Executive Directors who meet two or three times a week with the head of the institution in the chair. These Boards represent the 184 members and consist of 24 Executive Directors. Europe has one third of these chairs. There are marked differences in the composition of the Boards: The five largest members (US, Japan, Germany, France and UK) along with China, Russia and Saudi Arabia have their own seats. The other 16 Executive Directors represent the rest of the membership in constituencies that vary in size. The two sub-Saharan African groupings have the largest number of 19 resp. 24 countries.

Within the Bretton Woods Institutions (BWI), the EU stands somewhere between the United States as the dominant major shareholder and the large group of borrowing countries. With its economic clout and “soft power” credentials, it could and should play a much larger role in these powerful organizations. But this comes at a price, because emerging markets in Asia and the truly poor like the sub-Saharan countries are becoming increasingly vocal about changing a power structure established at the end of World War II that no longer reflects realities that have changed dramatically.

Although the EU with its obvious over-representation would be the main “victim” of governance reforms, it would get a lot of mileage if it spearheaded them with a “grand design.” But for the EU this would also mean squaring the circle, as it would have to make a much greater effort than hitherto to speak with one voice while at the same time reducing its representation in the IMF and World Bank governing bodies.

The EU has therefore to unite but shrink. European finance ministers have occasionally discussed this highly controversial topic, but have not pursued it further because of strong resistance from some (smaller) members that also represent borrowing countries. The time has now come for EU foreign ministers and for Javier Solana as the Council’s High Representative to take a political decision to cut the Gordian knot. Although the US has always considered the Bretton Woods Institutions as important foreign policy instruments, the Europeans have in contrast left involvement in these organisations largely to finance and development ministers and to central bank governors.

The advantages of a much more active EU role in BWI governance reform are several. The EU would increase its international influence and would be seen as reaching out to the rest of the world by reacting positively to widespread concerns over how the two institutions are run. With a progressive policy for change, the EU could steer the global debate rather than act passively when other forces – which grow literally by the day - seek to impose reforms on it. The EU would then also catch up with the US in incorporating the Bretton Woods Institutions (BWI) into its own foreign policymaking process.

At the moment, the EU is far from speaking with one voice in either the IMF or the World Bank. For historical reasons, its member states are split up into 10 constituencies. Germany, France and the UK have their own Executive Directors, and the other EU members are in mixed groupings of different composition. The most homogeneous among them are the Nordics, with six EU members plus two other industrialised countries (Norway and Iceland). Similarly, the Italian-led group only has two non-EU members, but they are borrowing countries (Albania and Timor-Leste). The other two constituencies (led by Belgium/Austria and the Netherlands) are truly mixed in that they consist of EU donor countries and borrowing countries which may (although probably not some like Kazakhstan, Armenia and Georgia) eventually join the EU. But in the case of the Netherlands, there are no other EU members in the group besides Cyprus as the rest are borrowing countries. Poland is in the Swiss-led group, Spain belongs to the constituency of Central America and Ireland to Canada and the Caribbean. This hotch-potch makes any EU coordination extremely difficult, if not impossible. Furthermore, Germany, France, the UK and Italy are members of the “trade union” of the G-8 and often have their own agenda. Of the 25 EU countries, 12 are part of the eurozone that is now developing its own coordination mechanism inside the IMF.

Ideally, the EU should aim at one single seat on both Boards. But at present this appears so revolutionary as to be unrealistic. An interim second-best solution would be to make the mixed constituencies “EU only”, and at the same time to integrate Spain, Poland and Ireland. Notwithstanding the fierce resistance of potential “losers”, even this constellation would leave the EU with seven chairs. Together with the Swiss-led group, Europe would still have a third of the 24 seats, leaving 16 for the remaining 150 BWI members, of which the US, Japan, Saudi Arabia, Russia and China have their own seats. This would mean that 145 countries would continue to be squeezed into 11 groups.

An easy way out for increasing the seats of “under-privileged” countries would be to leave the present EU representation untouched (even after a realignment) and simply increase the number of seats beyond 24. This, however, would make the IMF and World Bank boards of directors even less manageable and efficient. So the right answer to this dilemma can only be to reduce the number of seats from 24 at present to around 20 at most. In this context, the EU could step up the efficiency of the boards by setting the example of sending higher level representatives who should also have longer tenures.

Fewer chairs for the EU would mean that its 25 member states, plus any that join in the years ahead, would have to organize themselves in only three or four groups and make the “free” seats available to others. Such a reduction would also generate a genuine climate of goodwill for the EU. A look at the present voting structure underlines the widespread criticism that Europe is grossly over-represented, while the large groups of client countries are seriously under-represented. For example, it is increasingly hard to argue that India, with a population of over a billion souls, should have a voting share of 1.92%, while Belgium, with under 11m people, hangs onto 2.13%. The Netherlands has 2.38% but China has 2.94%. Europe and the US still maintain the “tradition” that the Managing Director of the IMF should always be a European and the President of the World Bank an American. All this has been building up a sense of frustration and anger, especially in the fast-growing economies of Asia. There is a widening credibility gap regarding these institutions that preach the merits of good governance to their clients while remaining stubbornly silent about restructuring their own houses, because the potential “losers”, especially the EU, cling to their positions.

Although the EU has so far remained passive and immobile, discussion about the necessary realignments of seats and voting powers has already begun at the level of independent experts. One proposal stands out: Put the US and the EU on an equal footing with 18% each. Establishing this parity would require a political decision, and it would also imply that the EU should be recognized as a single entity for the recalculation of voting rights. In that case, EU member countries which at present have a total of nearly 33% of votes at the IMF would lose a substantial part of that because their foreign trade component would be much smaller once intra-trade within the EU is deducted. Some estimate that the EU would lose some 40 % of its voting power. But even then, the EU might well – in purely arithmetical terms - end up having a higher share than the US, not least if its membership expands to include Turkey and the Balkans. A political parity decision would also diffuse the headquarters issue, which the present Articles of Agreement attribute to the largest BWI member.

For the EU to take the bull by the horns and come out with a “grand design” would harvest a great deal of goodwill. And this would benefit other areas of EU foreign policy. Governance reform might also include a discussion on the pros and cons of amalgamating the administrations and the boards of the IMF and the World Bank. The EU can point to the example of its forerunners, the Coal and Steel Community, the European Economic Community and Euratom, all of which were administered under one roof for about a decade before the treaties were finally merged in 1967. The Bank and the Fund already have joint annual meetings and such common bodies as the Development Committee, as well as joint policies like the enhanced Heavily Indebted Poor Countries Initiative. During the past two decades, the borrowing “clients”, the developing and transition countries, have been the same. If both institutions were to work under one roof that might well avoid duplication and ensure more consistent advice to the clients. As the two institutions would not be merged at this stage, the IMF's main mandate of surveillance of all member countries would remain untouched. It should perhaps be noted that the UK and France have always had one Executive Director for both institutions, which goes to show that BWI member countries could handle such an amalgamation without difficulty.

All in all, a reform-minded and proactive initiative by the EU could substantially increase Europe's influence in the Bretton Woods Institutions. Over time, this would also have a substantial impact on the character and the philosophy of both institutions. The EU might also use its enhanced role in the IMF and World Bank to place more emphasis on historical and socio-cultural considerations that differ from one country to another. And as a greater counterweight to the United States, it might be less dogmatic about the merits of privatisation, and might also choose to strengthen the notion of social market economies while emphasising the benefits of regional cooperation. As a “soft power” community, the EU might bring more of its worldwide experience to help shape policies. Certainly, an increase in the influence of the EU would be welcomed by the vast majority of the BWI member countries.

All this would demand a determined political effort by the EU. At present, the Union seems overwhelmed by its other problems, mostly internal ones. But life goes on outside the EU, and the forces demanding substantial governance changes of the Bretton Woods Institutions and real sacrifices by the EU become stronger every day. A farsighted, visionary EU would be well advised to seize this window of opportunity and launch a well considered “grand design” for both the Bank and the Fund.