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THE push to install another French politician to run the International Monetary Fund underscores the inflation and interest rate risks confronting Australia from the global economy's governance failures.
The post-crisis IMF reforms are supposed to catch up with the increased weight of the large emerging market countries such as China, India and Brazil that are driving the global recovery. The European rich countries in particular have to cede the influence they inherited from the so-called Bretton Woods system after World War II.
But Dominique Strauss-Kahn's sensational demise suggests that shuffling a couple of votes on a 24-member governing committee falls short of the trumpeted "important step toward a more legitimate, credible and effective IMF".
Within days of Strauss-Kahn's May 15 arrest in New York on sexual assault charges, the Europeans rallied behind French Finance Minister Christine Lagarde. They won't let go, particularly given the IMF's central role in bailing out their sovereign debt crisis. So one French politician would replace another, maintaining the six-decade European lock on the IMF's top job.
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Washington is acquiescing in part because it maintains a comparable hold on the World Bank. So, like bidding to host the soccer World Cup, it would take a thick-skinned outsider to challenge the "consensus" candidate.
This is partly because Lagarde herself is a respectable candidate, having been prominent in the Group of 20 nations' response to the financial crisis. British Chancellor of the Exchequer George Osborne says it would be a "very good thing" for the IMF to be led by a woman for once. And there are no compelling candidates emerging in Asia.
Yet the result is undercutting IMF reforms driven by Australia and South Africa as joint chairs of the relevant G20 working group.
"For too long, the IMF's legitimacy has been undermined by a convention to appoint its senior management on the basis of their nationality," Wayne Swan and South African Finance Minister Pravin Gordhan said in a joint statement on Sunday. "In order to maintain trust, credibility and legitimacy in the eyes of its stakeholders, there must be an open and transparent selection process which results in the most competent person being appointed as managing director, regardless of their nationality."
Former IMF chief economist Raghuram Rajan calls for a short list of candidates that excludes Americans or Europeans "in the interest of breaking from history". South Africa offers its former finance minister Trevor Manuel. But Swan shows no sign of nominating an Australian or an Asian for the job.
The issue is more than simply a scramble for a top job at a multi-lateral financial agency. It's about the vacuum of responsibility for managing the global economy.
The US is weakened by its halting economic recovery and politically paralysed by its public debt burden. The Europeans are obsessed with defending the euro zone. Yet the Asians are too politically and institutionally immature to match their new-found economic weight.
The image of then IMF managing director and former French central bank governor Michel Camdessus sternly looming over a compliant Indonesian president Suharto during the 1997 East Asian financial crisis helped drive Beijing's determination to build up its massive war chest of foreign reserves in the 2000s. This was recycled into the US financial system to finance the US trade and budget deficits and inflate its pre-crisis housing bubble.
After the crisis, however, the US has failed to fix its underlying contribution to that crisis: its gaping budget deficits. Instead, it has cut official interest rates to zero and is printing money to drive down the greenback and stimulate an export-led recovery. It mouths support for a "strong dollar" while actively weakening it.
But China is resisting the loss of competitiveness that would come from a significant stronger renminbi against the greenback. As Australia's new Treasury secretary Martin Parkinson suggested last week, this means China's strong economy is importing the monetary policy designed for the weak US economy. The required "rebalancing" of the global economy instead requires China's "real" exchange rate to appreciate in order to blunt its competitive edge. But if the renminbi's nominal value is repressed, Parkinson suggests the "competitiveness adjustment" will be delivered by higher inflation in faster growing China.
This is inflating the surge in food, oil and other commodity prices and, in turn, the bubbling global consumer price inflation that is being validated by loose global credit. By battling to cheapen their currencies, Washington and Beijing are debasing both through higher inflation.
The Reserve Bank of Australia last week warned that "monetary policy remained accommodative in most countries, which was adding to pressure on commodity prices".
Rich country central banks such as the US Federal Reserve and the Bank of England board vow to "look through" the first-round inflationary effect of rising food and petrol prices. They argue the commodity price surge is mostly driven by "exogenous" factors such as crop failures, Middle East turmoil or loose Asian credit conditions.
However, part of this global price shock can be sourced back to ultra-loose US monetary policy, which is feeding into loose Asian money and becoming embedded into higher inflation expectations.
Most Australian economic data has been on the soft side since since the RBA's May 3 board meeting signalled it would soon start lifting interest rates again to keep inflation within its 2 per cent to 3 per cent target band.
This and the renewed euro-zone financial instability means the RBA almost certainly will sit pat at its June 7 board meeting. But a rate hike is likely to be a live option at its July 5 and August 2 board meetings, which will straddle the June quarter consumer price inflation release. The RBA's quarterly monetary policy statement on August 5 will reveal whether it still forecasts underlying inflation bubbling up above target.
The local mining investment boom and global inflation pressures fuelled by the vacuum of global economic leadership are pushing the RBA towards tightening even though much of the domestic economy remains soft.
The appointment of a CEO for the IMF from the Asia-Pacific region makes sense. Europe, save for Germany, is broke. The economic powerhouses of the post-GFC world are all in Asia. Why hand this global bonus to another Euro-centric Frenchman?
The current crisis could end up with worse consequences than the great depression. Since abandoning the gold standard politicians around the world have lost the plot completely. We have Ireland that owes so much money it cant pay the interest on the debt it owes. Same for Greece Portugal Spain and many other countries that have squandered their countries wealth buying votes in the next election. Politicians of all shades around the world are guilty of this
Sorry wrong on this one. The USA and Europe contribute about 30 to 40% if not a bit higher to the funds of both the IMF and world bank. I see no reason why some country who is not footing the bill and has no skin in the game shd put up someone to head these organisations. the operation of both these organisations is in any event spread amongst mostly so called developing countries with many appointees based on who they are related to in their home countries. so it is better to have it represented by a country footing the bill as opposed to one/s that shout loudest, provided the preson is of high quality. If a major country has a good candidate that one shd be elected. I see no candidate better than the french candidate, so she shd be selected for both reasons.
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