Most world leaders left the G20 meetings in Cannes last weekend with little to show and with great disappointment at failing to come to any detailed resolution over many of the key systemic issues that were on the agenda. Yet, there appears to be one unintended winner of the Cannes summit: Christine Lagarde and the International Monetary Fund (IMF). The managing director of the IMF and former French finance minister, who played a key role in organizing the G20 agenda under her former — and known to be prickly — boss President Nicolas Sarkozy, left the meetings with promises of additional funding, boosting of global confidence in IMF surveillance roles and endorsements from China and Brazil in the IMF as the credible monitor of Europe’s promises at reform. At what was likely his last G20 meeting, the embattled president of France was overshadowed by Lagarde’s success.
Christine Lagarde left the Cannes meetings with “the promises of unlimited funds” to boost IMF resources. While no figure was mentioned, she reiterated that the G20 members offered the IMF all the financing that would be required to prevent and react to any global financial meltdown that may affect vulnerable IMF members. The IMF’s existing coffer of US$400 billion is insufficient to meet the amount needed to confront a financial crisis in a systemically important country. Italy’s bond debt for 2012 alone exceeds the IMF’s funds. The key will be to get capital surplus countries such as China, Saudi Arabia, Brazil and others to commit some of their trillions of dollars in global savings to the organization. If the promises Lagarde received extend to those emerging market economies that have recently shied away from committing resources to the IMF, then this is a dramatic turn for the IMF and signals renewed faith in the once terminal-looking international financial institution.
The other dramatic turn at the G20 came in the unorthodox move of Italian Prime Minister Silvio Berlusconi, who agreed to open Italy’s accounting books to the quarterly audit of the IMF staff. Although he refused to accept an IMF loan, Berlusconi agreed to allow the IMF to ensure that Italy is indeed fulfilling its promises to European partners and that his government is both serious about and capable of tackling its burgeoning debt levels. Accepting IMF surveillance of its books is an endorsement of IMF impartiality in the euro zone crisis, and re-establishes the IMF as the impartial “umpire” — a role it had lost for failing to predict and warn of the 2008 international financial crisis and previous financial crises like the 1997 Asian financial crisis.
Refusing to give the European leaders bilateral loans to the European Financial Stability Fund, both China and Brazil have indicated that they will channel any funds to Europe only through the IMF. Where China and Brazil, two large and important capital surplus countries, had previously showed a preference to use bilateral channels to support ailing and allied countries, their insistence on the IMF as a conduit for support to Europe is both a slap in the face to the European Central Bank and EU states, but more importantly, it notes a cautionary return of faith in the IMF’s surveillance function. The IMF had been sidestepped by many of the emerging market economies for its past policy failures, and for overrepresenting European interests instead of its own.
With Europe struggling to keep the euro zone afloat, it is finally admitting it needs outside assistance of both money and ideas. The IMF under Christine Lagarde has, perhaps, secured a renewed faith of European members and emerging market economies in its ability to help guide the global community out of the storm. While this is welcome news, let us not forget the IMF surveillance is still in great need of reform. Numerous reports and studies have shown that the IMF toolkit needs a significant reassessment and upgrade; if we are to restore our faith in the IMF surveillance role, let us hope that the Fund will make good on efforts to reform from within.
