For a while, during the meetings of the G-20 in the peak of the crisis, it seemed that there would be genuine international coordination to reduce systemic risk in the world economy. While the G-20 did admirably in coordinating stimulus, its impact elsewhere has been more limited. And as Greece leads a set of small European economies towards a possible sovereign debt crisis that could trigger another round of global financial uncertainty, the question to ask is ?where is the IMF?? The reform of the International Monetary Fund, to make it more representative (in favour of emerging economies like India and China) and more effective in preventing another global economic crisis, was on top of the agenda of the G-20. But as the global economy has recovered, the momentum for institutional reform has slowed down. Still, there is no better time to revitalise the IMF than now.
The scenario in the economies of Greece, Portugal and Ireland is tailor-made for an IMF intervention. Back in the 1980s and 1990s, a similar debt scenario in a developing country would have had the IMF pressing for strong intervention backed by its major shareholders from the US and Europe. And despite the skewed politics of its governance, the IMF?s intervention was often useful in helping countries overcome crises of sovereign debt or crises in balance of payments. Needless to say, IMF aid came with a number of difficult conditionalities, including severe fiscal austerity and structural reforms of the economy. But then there is little other choice for profligate economies that live beyond their means. Greece et al desperately need a dose of externally imposed austerity. It is in the rest of the world?s interest to see this happens, given that we have just emerged from a crisis and it?s far too early to confront another. Of course, since these are eurozone economies, the IMF can?t just walk in unless invited by the major economic powers in the eurozone. It makes much sense for Germany and France to ask the IMF to intervene, rather than arrange a bailout within the zone. The latter will simply be a recipe for moral hazard?if the badly run economies of Europe are guaranteed a conditionality-free bailout, then there is no reason to reform. The IMF, on the other hand, can impose a discipline that France and Germany cannot. Either way a decision will have to be made soon because the instability of some countries is taking a toll on the euro. Time then to call in the IMF, and use this as an opportunity to reinvigorate a fading institution.
