The IMF Isn't Worth Another Penny of Anyone's Money
An increase in subscriptions to the International Monetary Fund (IMF) is not the kind of issue that usually raises much heat in parliaments or the press. But when U.K. legislators voted on plans to pay more into the Fund on Monday this week it led to a revolt among MPs, and was only narrowly won by the coalition government.
The U.K. is increasing its annual subscription to the Fund by 88%, taking it to almost £20 billion a year. Other member states can expect to see the amount they have to pay into the organisation go up as well - a pressing issue for the United States, which is the largest net contributor to the IMF, and which, just like the U.K., is not in any position to throw money around carelessly.
In truth, the British, and everyone else that contributes more cash to the IMF, are making a terrible mistake. The Fund isn't worth another penny of anyone's money. By devoting itself to bailing out bankrupt eurozone nations such as Greece, Ireland and Portugal it is betraying the rest of its members, and making the global economy less stable. It would be better to put it out of business than to let it carry on as is.
True, the money that members contribute to the IMF is technically a loan rather than a payment. It may never actually have to be handed over. Then again, plenty of bankers will tell you that the money they are giving people is only a loan. That doesn't stop the deals sometimes turning sour - and leaving the lender with a huge bill to pay.
By getting involved in the euro crisis, first with last year's bailout of Greece, and then with both Ireland and Portugal, the Fund has made a terrible blunder. It was easy enough to see why the European Union wanted to get the IMF on board. The Fund provided some of the money for the bailout packages, and so made selling the deals to skeptical voters in Germany and the Netherlands and Austria a little easier. And it meant that the IMF could take some of the flak.
Instead of the EU imposing massive austerity packages on Greece, the Fund could play the bad cop. It's officials don't have to stand for election, so the inevitable unpopularity that comes with cutting people's wages and pensions doesn't matter so much.
There are two big snags, however.
First, the countries the IMF is bailing out are all relatively wealthy by international standards. Even Greece and Portugal are clearly first-world economies. Ireland before the crash was rated by the OECD as one of the five wealthiest countries in the world, measured by GDP per capita, along with the US, Switzerland, Norway and Luxembourg.
There is no reason why they should receive money from the rest of the world - including countries that aren't as rich as they are - just because they've chosen to adopt a monetary system that doesn't work very well. We might buy into the idea of helping out less well-off nations, but it is very hard to see taxpayers in Australia or South Korea should be asked to permanently pay for the crisis within the eurozone. Over time, they will get fed up, and withdraw from the Fund. Does that promote financial stability? Of course not.
Next, the Fund is not even insisting on realistic economic policies. Massive austerity is being imposed on Greece and the other rescued nations - but without the exit from the euro that is now the only way to salvage their economies. The Greek economy is forecast to shrink by another 3% this year.
Only this week, the Greek government admitted it was missing the deficit reduction targets set out in the bailout plan for this year. Why? Because tax revenues were lower than expected. Admittedly the Greeks don't like paying tax very much, the same as the rest of us. But does no one at the IMF understand that when an economy is in deep recession, tax receipts go down? It is clear to anyone that the plan isn't working. By pushing on with it, the IMF is simply ruining its credibility.
The IMF's mission is to promote financial stability. Except on the shortest possible time horizons, it is hard to see how shoring up the euro does that. The single currency has become the main source of instability in the global financial system, creating a rolling series of ‘Lehman' moments as the crisis moves from country to country. There is a constant threat of another banking crisis - because no one knows where the liabilities might end up if one of the euro countries defaults. Bond markets tremble day-by-day on the edge of a precipice. It is impossible to argue that isn't damaging the global economy.
The Fund got it wrong when, under Dominique Strauss-Kahn, it agreed to take part in the Greek rescue. There is little chance his successor, Christine Lagarde, will change course. But there is one sure way to stop people from doing dumb things. Stop giving them more money. Even the IMF's economists might be able to see that.