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Friday, April 20, 2012

Should the UK contribute to the IMF?

George Osborne is in Washington DC today for an IMF meeting. In another one of those ‘domestic politics meet financial crisis’, Osborne is under pressure from his MPs not to contribute any more cash to the IMF unless there are guarantees that the money won’t be used, as the popular phrase is in Westminster goes, to “bail out a currency” (and no, we’re not talking about the Yen). There are a whole range of confusions surrounding this entire debate, so here’s an effort to clear them up:

Where are we at?

The UK can provide £10bn without a vote in Parliament, as this cash goes back to a previous commitment. For anything more, it needs approval from its MPs, which could be sticky (see below). Osborne has so far refused to contribute the £10bn, let alone even more, until certain conditions have been met.

Is contributing to the IMF the same as giving to, say, the EFSF (the euro bailout fund)?

Certainly not. The IMF is (a) a serious organisation that has saved many countries including the UK (b) its loans rank senior to other debts and so are always repaid (c) nobody has ever lost a cent on the IMF and (d) this would actually be an opportunity to modernise a 1948 organisation by giving the BRICs a more proportionate say in return for fresh capital (if you want to keep the IMF relevant, this is inevitable).

Are Tory MPs really that opposed?

There’s been a lot of shouting to the press over this issue, but the feeling is that most Tory MPs realise that contributing to the IMF could be a sensible move provided that certain conditions are fulfilled.

So what conditions need to be fulfilled for the UK to contribute?

The UK government has set out two: the top-up needs to be global (all countries contributing not only EU ones) and the money can’t be used specifically to bail out the euro.

We would add that there also needs to be a change in tact. As we told BBC five live this morning, “The main problem is that the eurozone’s approach to the crisis hasn’t changed, despite widespread criticism including from the IMF, it still fails to address the underlying problems: the lack of growth, the lack of competitiveness in the peripheral countries and the massive risks still held by the under capitalised European banking sector. Any further contributions should be conditional on a change in tack and some acceptance that this bailout and austerity policy has failed.”

What is likely to happen?

At the moment it looks as if the IMF will reach its target of $400bn, possibly even without funds from the UK, US and Canada. The two latter countries look unlikely to contribute additional funds, so the prospect for additional contributions from the full membership looks dim.

The question is, what will the IMF need to give in return? A rebalancing of power towards emerging market members is inevitable and the BRICs are pushing for it to start in exchange for funds this time around. That means there are plenty of complex negotiations still to take place. A broad political agreement may be in place by the end of the weekend, but there will be plenty of legal and technical details to be fleshed out.

Will the increase change anything?

Not really. Ultimately dispersal of IMF funds in the eurozone crisis is reliant on similar provisions from the eurozone bailout funds. So far the format has been 2/3 eurozone and 1/3 IMF. As we have previously noted, despite EU claims, the lending capacity of the eurozone bailout funds remains €500bn. This means the maximum which will likely be able to be tapped from the IMF is €250bn (although it is incredibly doubtful the IMF would ever put up that much unless the eurozone were teetering on the brink). As is often the case, the issue of IMF funds is tinkering at the edges of the crisis, eurozone leaders still fail to address the underlying problems of the crisis or even put up a sizeable bailout fund of their own.

Should the UK contribute then?

Well, first the government should wait and see if the $400bn target can be met without a UK contribution. If that is the case all the better. If not, and if all the BRICs have contributed, the UK may need to put up its £10bn (which has already been approved by Parliament). Obviously, as we have noted the usual caveats and conditions should apply and the UK along with the IMF should continue to push for a reformed approach to the crisis.


Rollo said...

NO. The IMF is there to help nations restructure their finances when they have difficulties. It is not there to prop up an untenable construct of the Euro. It is not there to tr54ansfer debts from banks to the tax payer. We should contribute nothing to this futile exercise.

christina Speight said...

I concur with Rollo's posting. Until the EU generally faces the fact that short of a full merger into a single state of the eurozone nations there is no way the euro can succeed. The EU leaders will not admit this fact which is staring them in the face and has been for years.

Until they can swallow their pride and admit this, and wind up the euro in an orderly fashion there is no need
whatsoever to contribute to their vanity

Hal (GT) said...

I will add my affirmative to Rollo. Any more contributions are merely an attempt to forestall the inevitable.

Anonymous said...

Quite right, Rollo & Christina. The EU has successfully managed to waste several hundred euros already over the last 2 years in unsuccessfully under-writing the basically uncompetitive PIIGS, & seems quite complacently prepared to continue doing so until the end of time (or until the euro or EU collapse, whichever of these 3 is the first)! The only support members of the euro-zone still deserve is for the IMF to assist the weaker members in a small way when they de-couple & devalue (with some probably defaulting also) as they wisely abandon the euro & return once more to their own national currencies. When might this be? Almost certainly in 2013 - though it could possibly even occur later this year!

Denis Cooper said...

"Ultimately dispersal of IMF funds in the eurozone crisis is reliant on similar provisions from the eurozone bailout funds."

While that remains the case, how can the Irish people freely express their will through a referendum on the "fiscal compact"?

The "fiscal compact" is being widely criticised by economists, it is being described not just as the "Austerity Treaty" but as the "Permanent Austerity Treaty", and yet as a briefing for the Irish Trade Unions Congress put it:


"Clearly we are between a rock and a hard place ... Trade unions in all European countries are against this treaty for good reasons. The problem for us is that we are a programme country with the gun of ESM pointed at our heads."

"While the treaty is wrong from our economic and social perspective it becomes hard to oppose it unless a satisfactory alternative to the ESM can be advanced."

From the Irish Times this week:


"THE FISCAL compact is a “dangerous experiment” that will be “extremely painful” if implemented, an Oireachtas committee was told yesterday.

Prof Terrence McDonough of the school of business and economics at NUI Galway told the Committee on European Affairs the compact was “completely without historical precedent”.

Forcing a country at the bottom of a depression to run budget cuts and tax increases year after year, and forcing the same policy on its neighbours, was not “the safe option”.

“If the Irish people are against permanent austerity they should reject this treaty.”"

"Megan Greene, senior economist at economic research company Roubini Global Economics, said the treaty was Germany insisting all other countries look more like Germany. “It is completely misguided, but I still think Ireland should support it.”

She said rejecting the treaty would put important relationships with EU countries in jeopardy. Ireland would “absolutely need a second bailout” and she did not believe that if Ireland rejected the treaty the IMF would “break ranks” with the troika and provide funding."

I think Osborne should be looking at this question of whether the EU, in effect Germany, should be allowed to prevent the IMF from assisting Ireland in the event that the Irish people had rejected this "completely misguided" treaty, through which Germany is "insisting all other countries look more like Germany".

He's supposedly on close terms with Lagarde, he's just obliged her by agreeing to pledge another £10 billion of our money to the IMF, so why doesn't he press her to say that IMF assistance to Ireland or any other country would not be conditional upon its ratification of Germany's "fiscal compact"?

Rodney Atkinson said...

In lending £10billion to the IMF for the benefit of the rich (but catastrophic) Euro-zone, George Osborne seems to wish to support his protege Christine Lagarde at the IMF. There can be no other rational explanation.

Osborne seems to think that loans to Euro-zone countries would come with the usual strict discipline of an IMF recovery plan. But such plans contain prescriptions on currency floating, interest rates and gradual fiscal discipline. The Euro-zone is practising the opposite - denying those countries a central bank, their own interest rates and their own currency while imposing truly mad levels of self defeating austerity.

Any funds lent to save this doomed currency are unjustified legally and guaranteed to incur large losses while helping to bankrupt the countries involved.

I think Germany might be first to leave the Euro.

Rodney Atkinson