There. Is. No. Technocracy. Dammit.

Felix Salmon is one of my favorite journalists, but he routinely makes a common error: forgetting that there is such a thing as politics. Take this reflection on Tim Geithner in which Salmon wonders what made the former Treasury Secretary "change his mind" on how to deal with financial crises:

[T]he most obvious case in which Geithner has done a complete U-turn from his former views is that of Indonesia. The great Australian financial journalist Peter Hartcher explained this very well back in 2009, when Geithner took over as Treasury secretary. He quoted former Australian president Paul Keating explaining in a nutshell exactly what Geithner did wrong: “Tim Geithner was the Treasury line officer who wrote the IMF program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.” With hindsight, Geithner did the exact opposite of what he is now prescribing in the event of a crisis... 

Indonesia in 1998 had a problem not dissimilar to what we saw in the US 20 years later: a sudden credit crunch afflicting a country whose government finances were fundamentally sound. Geithner’s solution, now, is for the government to “be very aggressive” spending money, and for the central bank to provide its own monetary support, all in the service of “compensating for the huge collapse in private sector demand”. But that’s not what he thought in 1998, when he forced the Indonesian government to cut spending and raise interest rates — precipitating a recession much larger than anything the US saw during the financial crisis.

Now that Geithner is going to write a book, I very much hope he goes as far back as Indonesia, and covers his two-year tenure at the IMF as well, rather than glossing over those episodes on the way to the juicy stuff about the more recent crisis. For one thing, it will be fascinating to see when and how his mind changed on such issues. And for another thing, it’s conceivable that the book might shed light on the how this consummate career government technocrat thinks — and thereby shed light on much of the system of global governance.

This type of commentary bothers me because it is so common (which is why I keep harping on it). Isn't it possible, just possible, that an American public official might respond to a crisis in the United States differently than to a crisis in Indonesia for political reasons? Isn't it possible, just possible, that the reason why the IMF pushed Asian (and Latin American) countries into austerity in exchange for emergency finance is because the IMF's creditors cared more about getting their money back than about finding the most optimal solution to the problem? Isn't it possible, just possible, that an American central banker or Treasury Secretary might care more about American interests (and interest groups) than those of, say, Thailand? Of course those things are possible. So why doesn't Salmon mention them as a possibility?

There is quite a lot of political economy research on the IMF. None of it concludes that it is an impartial technocratic institution. It is involved in power politics, generally in ways which benefit US interests. It lends in a way that benefits the American financial sector. It trades lax conditionality for UN votes on the Security Council and in the General Assembly. It adjusts conditionality requirements based on the recipient's geopolitical importance, and enforces conditionality more or less strictly based on a country's ties to major powers. This is but a small sampling of the literature demonstrating that the IMF is a political, and politicized, institution. It acts in the interests of the major stakeholders in the major powers, especially the United States (which is the only country which possesses an effective veto on IMF funding decisions). The IMF is not on a relentless pursuit for the Most Optimal Policy as determined by the economists' imagined technocratic Benevolent Social Planner. (Needless to say, the US Treasury Department and Federal Reserve are even more political.)

In other words, when parsing Geithner's career we do not need to make an assumption that he has been on a quest to find technocratic nirvana. We don't have to assume that he's had a Road to Damascus moment which caused him to change his mind on key issues. All we have to note is that an American policymaker, when faced with very different crises in very different countries with very different levels of geopolitical importance reacted... very differently. That makes sense! That is what we should expect from an interested government official.

Interests, Ideas, and MIT Economists

Over at Bloomberg, Rich Miller and Jennifer Ryan have an article that should make constructivists smile:

At MIT, [Mervyn] King, 63, and then-professor Ben S. Bernanke, 58, had adjoining offices in 1983, spending the early days of their academic careers in an environment where economics was viewed as a tool to set policy. Earlier, Bernanke and European Central Bank President Mario Draghi, 64, earned their doctorates from the university in the late 1970s, Draghi with a thesis entitled “Essays on Economic Theory and Applications.” 

[Stanley] Fischer, 68, advised Bernanke’s thesis on “Long-Term Commitments, Dynamic Optimization and the Business Cycle,” and taught Draghi. Greek Prime Minister and former ECB vice president Lucas Papademos and Olivier Blanchard, now chief economist for the International Monetary Fund in Washington, earned their doctorates from MIT at about the same time. 

Other monetary policy makers who have passed through MIT’s doors include Athanasios Orphanides, head of the Central Bank of Cyprus, Duvvuri Subbarao, governor of the Reserve Bank of India and Charles Bean, King’s deputy in the U.K.

This almost immediately brought to mind Jeffrey Chwieroth's 2007 article -- expanded in his book Capital Ideas -- "Neoliberal Economists and Capital Account Liberalization in Emerging Markets" (ungated). Chwieroth analyzed the behavior of IMF staffers and argued that their policy recommendations was highly influence by where they received their postgraduate education: economists that came from "neoliberal" economics departments advocated for neoliberal policies.

When I first read the paper I focused a lot on what constituted a "neoliberal" economics department. It seemed a bit arbitrary. Chwieroth's list of neoliberal departments included eight important schools: Cal-Berkeley, Brown, Carnegie Mellon, Chicago, Harvard, Hebrew (Jerusalem), Johns Hopkins, NYU, Northwestern, Penn, Princeton, Stanford, Wisconsin, and Yale. These came from a previous article by Chwieroth, in which he presents a methodology for linking abstract concepts to empirical identities.

I don't know what is an appropriate test of the validity of this methodology, but a list that includes both Chicago and Berkeley as normatively similar raises an eyebrow. As does one that includes Harvard and Princeton but not MIT. This certainly cuts against the "saltwater vs. freshwater" story that folks like Krugman tell. (Krugman was also at MIT during this period.) Perhaps Chwieroth's classification works for the specific issue he's considering -- capital account liberalization -- and not more generally.

In any case, the Bloomberg piece also made me recall Krugman's talk of the "Dark Age of Macroeconomics", in which freshwater economists have forgotten everything they were supposed to know about how the economy works. Krugman complains about the belief in "confidence fairies" and "expansionary austerity", and about how "wise men" who are setting policy are making such significant mistakes that we are doomed to at least one lost decade and maybe more.

As the article points out, in an impressive number of cases these policymakers are saltwater economists, from MIT, who think of economics in the same way that Krugman does and received the same education from the same people at roughly the same time as he did. What does this tell us?

It could be that everyone in the world except for Krugman is an idiot, or it could be that everyone in the world but Krugman is a vicious liar. Or it could be that policymakers are highly constrained by the fact that economic issues are highly contentious. Particularly in democracies, political interests and ideas are often much more important than economic training or even ideology. In the end, it matters much less that some central bankers went to MIT in the 1970s than that the interests of the median Greek are divergent from the interests of the median German.

And if that's true, then why does everyone spend so much time talking to economists about political dynamics?

The IMF Isn't Technocratic Either

The title of a recent post at The New Republic is "How the IMF Got It's Keynesian Groove Back". I don't want to pick on author, Jared Vary, too much as he appears to be an intern at TNR, but I see this line of reasoning proffered from more credentialed folks all the time and it drives me crazy. It basically goes like this: originally, the IMF was a fairly kind, generous, technocratic "Keynesian" institution, which was corrupted over time by a "Chicago school" ideology that made crises worse rather than better by insisting on harsh austerity. After the IMF botched up 1990s crises, they started to return to their postwar Keynesian roots.

This type of narrative relies on a view of the IMF that is, I think, inherently flawed. IMF actions have varied along with the geopolitical issues of the time. More specifically, it has always taken actions that the major Western powers, particularly the U.S., wanted. (The U.S. is the only single country with an effective veto, since it has always controlled over 15% of the voting rights and actions must be approved with an 85% majority.) These preferences were not consistent across countries or time, and there is no reason to expect that they would be. During the Bretton Woods period, the IMF was used to used to balance the fixed exchange rate system that embedded the U.S. at the center of the international economic system. In the 1970s and 1980s, the IMF was used as a sort of bailout device for commercial banks in the U.S. and Europe, which owned too much emerging market debt. Harsh conditionality was tied to these loans because the purpose of them was to help the banks, not the indebted countries. In the 1990s the IMF behaved differently depending on the geopolitical context. Loans to countries undergoing post-communist traditions had fewer conditionalities attached to them than loans to East Asian countries or the Latin American countries in the 1980s.

The above paragraph draws from a fairly long string of research on these questions. While the ideational view has some support from folks like Chwieroth, materialist explanations of the IMF's behavior are more prevalent in the literature. Strom Thacker wrote about the "high politics" of IMF lending, and showed how countries that "move toward the political space of the U.S." -- for example by voting with the U.S. in the U.N. -- have a greater chance of receiving loans. Oatley and Yackee extend this further, showing that countries with a lot of indebtedness to U.S. financial firms receive larger IMF loans, as do countries that are allied with the U.S. Randall Stone finds that conditionality is enforced less on countries that are important to the U.S., and can offer the U.S. something valuable in return. Finally, Grigore Pop-Eleches argues that the size of IMF loans and type of conditionalities attached to them varies according to geopolitical, rather than economic, concerns. Indebted Latin American countries in the 1980s had more strings attached than transitioning Eastern European countries, because the major Western powers had an interest in a smooth transition away from communism towards capitalism, and towards greater integration of the European continent.

The point of all of this is to say keep reiterating that there is no technocracy. Institutions like the IMF are inherently political, and act accordingly. The constituent members of these institutions are also political, and will use the institution to suit their ends when they are capable of doing so. Often this will involve issue-linkages and quid pro quo arrangements, so it may not always be transparent, but that doesn't mean it isn't happening.

Update: See also this previous post from Thomas.

The Argentinian Euro Deal

Markets seemed to like it yesterday, not so much today. You can find news and discussion of the plan everywhere. I liked Salmon's takes here and here.

Like many others I'm skeptical that it will work. Interestingly enough I'm currently reading Paul Blustein's very good And the Money Kept Rolling In (and Out) about the IMF's relationship with Argentina around the turn of the millenium. The parallels between Argentina and Greece are striking -- I'm not the first to notice this -- but the parallels between the IMF and EU actions are also notable. Let's run down some of them.

1. At the time Argentina was on a convertibility system with the peso was pegged one-to-one to the US dollar. This is functionally very similar to the European common currency, where "Greek" euros are pegged one-to-one with "German" euros. Both systems were adopted for similar reasons: national authorities were not able to credibly commit to stable monetary policy, which led to a lot of economic volatility, investment risk, and concomitant slow growth. In both cases macroeconomic adjustment is impossible through the exchange rate, which leaves internal devaluation (i.e. austerity) and/or debt default as the only remaining options.

2. Both policies worked well for about a decade. Because of that, the Argentine and Greek governments were able to borrow at low interest rates. And because of that, governments were fairly casual about fiscal probity. While public deficits were not extreme, they were politically entrenched. When growth began to slow lower tax revenues led to a growing debt burden. Interest rate spreads widened as investors began to believe that both economies would not be able to grow fast enough to manage their debt. This, of course, can become a self-fulfilling prophecy. Both governments were voted out of office, both new governments instituted fiscal reforms. In both cases these were insufficient to close the budget gap. In both cases the cost of incurring new debt, or of servicing old debt, became prohibitive.

3. In Argentina, the IMF began disbursing relatively small amounts of money in the hope that external financing would reassure bond markets. In other words, the IMF hoped that it was a liquidity crunch, not a solvency crisis. In that situation a tie-over loan can buy time for the economy to get some growth back. The EU did the same thing with the introduction of the EFSF. But the underlying economic numbers didn't improve, and bond markets continued to believe that issue was over solvency, not liquidity.

4. Politics intervenes. In Argentina, the US (and other key IMF members) were hesitant to offer additional financing as they had done during the Tequila Crisis. In particular, John Taylor -- then at the Treasury Department -- didn't want to throw US funds into the pot. Neither did Glenn Hubbard of the CEA or Paul O'Neill, the Treasury Secretary. In Europe, many members were reticent to commit more funds. In both cases policymakers tried to figure out how to leverage already-appropriated funds to have a greater effect, but nobody bought it in either case. (Ken Rogoff, at the IMF during the Argentina crisis, quipped "After one strips out all the window dressing, there is no way to make $6 billion of liquidity worth more than $6 billion in liquidity. But there are many creative ways to make it less.")

5. Then come the "voluntary" private sector haircuts, coupled with additional public funds. These are intended to do a few things: extend the timeframe that indebted countries have to consolidate fiscally, reestablish growth, force the private sector to bear some of the costs of bailouts, and thus prevent default in a politically palatable way. In both cases the initial market reaction was positive, but in Argentina the effect was short-lived and I expect that to be the case with Greece as well. Barry Eichengreen described the Argentina situation thus: "The realization had dawned that the IMF package offered no magic formula for getting growth going again. And without growth, it is hard to see how political support for paying the foreign debt can be sustained." This sounds a lot like Greece, no?

6. A corollary of the private sector haircuts, as well as extended financing from international institutions, is that the country actually becomes more indebted rather than less. This happens in two ways. The private sector demands some form of compensation in exchange for voluntarily altering the terms of their debt contracts; and the new financing from international institutions also tacks onto the principle. Additionally, it's more difficult to default on IMF/EFSF loans than private sector loans. Given that the optimistic scenario is that this deal will reduce Greece's debt load to 120% of GDP, and the fact that the fundamental problems -- low growth + high debt in a fixed-currency system -- have not been resolved, there is little reason to be optimistic about the outcome.

Ultimately Argentina's internal adjustment plans were undermined by domestic politics. Voters simply got sick of extreme austerity and revolted. That meant a debt default and the abandonment of the convertibility system. It's hard not to imagine a similar scenario playing out in Greece in the coming months.

Even if it doesn't, there's still Spain and Italy looming over the horizon.

The IMF Is Political, Not Technocratic

AFoE:

To spell it out, Egypt and Belarus are both looking for around US$3 billion. Egypt gets it with an explicit deferment of structural reforms as long as there is an “action plan.” Belarus will have to do reforms before there’s a loan. Does anyone else see a political version of moral hazard here?

For more on this dynamic, see this excellent book by Grigore Pop-Eleches. The "Arab Spring" may end up as an out-of-sample test of his central hypotheses. For the US's role in conditioning the IMF's behavior, see this by Thacker, this by Oatley/Yackee, and much of James Vreeland's career.

I don't have too much worry of a moral hazard here, since it didn't very well serve Mubarak's interests to hang on for the best possible IMF deal.

On Blanchard on Capital Flows and the IMF

Oliver Blanchard went to a IMF conference on capital flows, and wrote up some thoughts. It's well worth reading the whole (short) post, if only to see where the IMF's thinking on this is right now, but I want to highlight a few bits.

First, while the issue of capital controls is fraught with ideological overtones, it is fundamentally a technical one, indeed a highly technical one. Put simply, governments have five tools to adjust to capital flows: monetary policy, fiscal policy, foreign exchange intervention, prudential tools, and capital controls. The challenge is to find, for each case, the right combination.

Regular readers will guess that I disagree with this completely. The issue of capital controls is not just "fraught with ideological overtones", it is also fraught with distributionary consequences. If governments choose to restrict capital flows using one of the five tools Blanchard lists, then they will be benefitting some groups over others. Which of the five they employ will also involve winners and losers. From this perspective there is no "right" combination, only choices that advantage some members of (domestic and global) society and disadvantage others. The challenge for political leaders is to find the combination that will allow them to remain in office. The challenge for interest groups is to push for the combinations that will benefit them. But this is not a technocratic problem, or at least not just one.

Blanchard gets close to understanding this a bit later, when he writes:

The nature of specific investors must inform the policy choices. We often think of inflows and outflows as coming from primarily from decisions by foreign investors. The reality is that many of these inflows and outflows often come from decisions by domestic investors. When this is the case, targeting nonresidents is largely misguided.

Layna Mosley, one of my professors, has done a lot of very good work examining how, when, and to what extent international investors place pressures on domestic governments*. There is less work (that I know of) that seeks to explain how, when, and to what extent domestic political actors (including investors) pressure their governments for certain types of policies related to capital flows. But surely this is a political question that requires a political answer. To the extent that the IMF isn't thinking about those issues they are probably missing the boat.

It is not clear that the diversity of approaches we observe in practice comes from different circumstances, or from suboptimal responses. It was interesting to observe for example that Chile relies on foreign exchange intervention, not on capital controls, but India, instead, relies on capital controls, not on foreign exchange intervention. Are these corner solutions really optimal?

Again... what is meant by optimal? Different policies will benefit different actors. In many of the cases under discussion there is no reason to think that we're on the Pareto frontier, but even if we are the actual policy choices reflect distributional concerns. Instead of trying to figure out whether these policy choices are optimal, we should be thinking of them in terms of bargaining theory. And because these policies involve international as well as domestic actors, we need to complicate the model to include multiple levels of analysis. Blanchard seems to realize this towards his conclusion.

There were some issues that I would like to have seen explored more fully.

One was the multilateral angle. As my IMF colleague Min Zhu said in his opening remarks, “ensuring that countries reap the full benefits of capital flows is a shared responsibility between advanced and emerging market economies, between surplus and deficit countries, between capital-exporters and capital-importers.” The challenge is to translate this into practice. What is the actual responsibility of source countries? Should they take it into account in conducting monetary policy, and if so, how? Should we worry about the “beggar thy neighbor” effect of controls? Some of the evidence presented at the conference suggested that these spillovers across recipient countries were not very large. Theoretical and further empirical work is badly needed here.

These are good questions, and they do need more work. But they are political questions, so economists are not very well suited to answer them. I understand that Blanchard's position within the IMF means that he has to focus on the technocratic rather than the political, but if he wishes the IMF to be an effective institutions in the future he should at least be thinking of the political implications of capital flows. This has been the IMF's weakness for decades; it's high time for them to get better on this score.

*I discussed this work briefly here, but interested folks are encouraged to read the actual research (linked in that post).

The Politics of IMF Leadership

Daniel Davies titles a recent post on the selection process of the new IMF chief "Taking the politics out of politics, and the international relations out of international institutions". Davies is correctly pushing back the notion that the IMF exists for technocratic perfection, specifically the argument (by Martin Wolf among most other popular writers) that the IMF chief needs to be an economist.

This is real "too important to be left to generals" territory. A "merit-based" selection process for the IMF top job is effectively assuming that all the issues the IMF faces are technical (not political), and that the problem is to find someone with sufficient technical economic skills to pick the right solution from a mass of confusing alternatives.

In fact, in general the IMF tends to face situations in which there are only about three or four real options, one of which is usually both massively obviously the best idea, and politically very difficult for some powerful constituency or other. That's why it's a political job. And the allocation between the USA and Europe was agreed at the original Bretton Woods conference as part of a very dicey compromise between the only two blocks which can print unlimited hard currency. It's an international institution, and one of the biggest problems in designing such an institution is to persuade the major powers that it is worth their while working through the institutional framework rather than through bilateral diplomacy. That's why the UNSC has permanent members, for example, and it's why France and Germany tend to get first dibs on important Commission posts.

I am no fan at all of the IMF (or of the way in which history is being rewritten to cast them as opponents of pointless austerity). But it does at least kindasorta work as an international institution, which is why I'm in favour of not fixing it.

Davies is right that the IMF is more about politics than about economics. That's the whole point of having an established international institution rather than a series of ad hoc transfers as needed: sometimes the ad hoc transfer won't come for political reasons, and that can lead to disasters like the 1930s. There are a number of political dimensions related to the IMF. One is the austerity politics in the debtor nation. The IMF is routinely portrayed (including by Davies here) as some kind of bogeyman, externally imposing its imperial will (or the imperial will of the US) onto smaller, less powerful countries. This is only some of the story. James Vreeland has done a lot of the best research on the IMF, and here's the abstract of a new working paper by him:

Many argue that governments use IMF programs to push unpopular policies past domestic political opposition. Many others have argued that the IMF is merely a tool of US foreign policy, providing loans without enforcing policy conditions. This paper addresses the inconsistencies between these two views, presenting large-n evidence supporting both. The domestic politics story, however, depends on international politics. The IMF can only be used to push through unpopular policies when the institution is not being used to reward friends of the US.

In other words, the IMF is a useful bogeyman for domestic leaders that want (or need) to pursue unpopular reforms, but do not have the domestic political constituency to do so. To the extent that some of these reforms are necessary (as they certainly are in Greece today), we may not want a kinder, gentler IMF. Better for the IMF to remain the scapegoat, thus giving domestic reformers some political room to move. Blame the institution, but pass the reform. Some of Vreeland's other work supports this idea.

There's another political aspect of the IMF that is less discussed. Dr. Oatley wrote a post last year about the politics of bailouts in creditor nations. Basically, the story runs like so: it is often politically unpopular for one country to give aid to other countries in times of need. Think about the typical German voter, who wonders why her tax dollars should be spent to reward the Greeks for their profligacy? A direct funding mechanism (like EFSF?) may not be politically sustainable in democracies. But an indirect funding mechanism (like the IMF) may be more politically successful, by making the bailout one step removed from budget politics in creditor countries.

We're seeing both elements at play in this crisis. Austerity is unpopular in debtor countries like Greece but is inevitable in some form, so if politicians can shift some of the blame onto the IMF it may help them get necessary reforms through. At the same time, voters in Germany and France don't like being expected to pick up the tab of the Europeriphery indefinitely, and have set 2013 as the expiration date for bailout funds. But the IMF doesn't have such a limit. It can extend funds when and where they are necessary. And funding the IMF is not as politically salient as funding other countries directly.

Because the IMF is facing domestic political pressures in creditor and debtor nations, as well as international political pressures from its constituent governments (particularly the US, but the role of EMs are growing too), its next leader should be someone that can navigate the political space and doesn't mind be blamed for everything that goes bad in debtor countries. The next leader should not be someone chosen for their technical economic nous, much less for their country of origin, but for their political sensibility.

I have no idea of Christine Lagarde is that person. I know very little about her. What I do know is that she's a bureaucrat, not an academic, and so presumably has a good sense of the European political situation. That's a start.

IPE Everywhere: DSK Gets Euro Advice in Rikers

Dominique Strauss-Kahn Arrested

Yes, that's the head of the IMF. No, it wasn't for impoverishing a poor country. It was for something lewder.

Some dinner companions told me about this tonight. My first (non-serious) thought: Sarkozy's trying to knock Strauss-Kahn down so he can't run against Sarkozy in the next election. But the alleged assault took place in Manhattan and he was arrested by U.S. policy, so now we get to look forward to years of the French lecturing us on how prudish we are. Great. Or maybe not:

“He came out of the bathroom, fully naked, and attempted to sexually assault her,” Mr. Browne said.

That's pretty horrible, if true. Maybe we can trade him back for Polanski.

Newsflash: IMF Is Nervous of Labor Parties

File this one under "obvious":

"The likely change in government in 2011 increases the political risks," that Ireland will not follow through on the deep budget cuts, bank restructuring and other measures promised to restore the economy, the report said in a section assessing the country's ability to repay IMF loans. ...

Still, the IMF said that the political risks to the program are "considerable," adding uncertainty to a process that has roiled European markets and heightened the sense of confusion around how the continent - and particularly the 16 nations that share the euro as a currency - will settle a long list of economic problems.

The thing to note here is that the Irish government did not originally want EU/IMF funds, and the opposition party still doesn't. If the Irish Labour Party wins next year's election, as it appears they will, then it seems likely that Ireland will renege on the agreement. And quite frankly they should. The Irish got a raw deal that is brazenly engineered to benefit European bankers over the populace. Ireland can point to Iceland's better-than-expected performance since it refused to guarantee its banking sector's debts and get better terms, or else boycott any deal, allow their banks to default, leave the Euro and devalue the currency, and try to recover that way. Either way, there is no reason to stick to the deal as it stands.

When An E.U. Bailout Is A U.S. Bailout

Yesterday I posted about how the Fed has been acting as the world's central bank, and how those of us who learned from Kindleberger view this as a very good thing. But it's not just the Fed, as the other parts of the U.S. are ready and willing to step in and provide funding for Europe via the IMF:

The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday. ...

The remarks foreshadow a visit to Europe this week by a U.S. Treasury envoy who is expected to visit Berlin, Madrid and Paris to hold talks on the ramifications of the debt crisis. ...

The developments have echoes of the pressure applied by Washington on European capitals last May to create the near $1 trillion EFSF safety net that was last week used to rescue Ireland after its banking crisis spiraled out of control.

Given what we know about how the U.S. uses the IMF for strategic purposes, we should think of this as primarily directed at protecting the American financial sector. Just as the European Emergency Financial Stabilization Fund is primarily intended to protect the German and French banking sectors. That is, large European financial firms are heavily exposed to southern European debt, and are also counterparties of large American banks. Remember that U.S. are exposed to European banks to the tune of $3.5 trillion. If debt defaults harm European banks, this could undermine financial stability in the U.S. as well. Given that EU regulators are requiring another round of stress tests for European banks, the solvency of the European banking system is still very much in doubt. For that matter, the U.S. banking system is still quite weak.

In other words, the E.U. sovereign debt crisis is starting to resemble the Latin American sovereign debt crisis in some important ways. The response of the U.S. to both is to mobilize the IMF to shore up the system with emergency funding to the counterparties of American banks, and turn to the Basel Committee to push the costs of stricter regulatory regime onto other states. We've seen this movie before (pdf).

I've noticed some howls of complaint about this (from Facebook friends, for instance, although I'm sure it will percolate into the punditocracy soon enough). The argument goes: "How can we afford to bail out Europe, when we can't afford to take care of ourselves?" The answer is twofold: First, we can't afford not to work for financial stability around the globe. The costs of doing nothing are likely much higher than any bailout costs. If the U.S. abandons the rest of the world, the result would be disaster and chaos. Second, as I said above, U.S. actions are about the U.S., not Europe. It's not even about preserving the monetary union, or happy-go-lucky feelings that come from European integration.

A proper view includes many more dynamics than just money going from the U.S. to the E.U.

Balancing Act

Just to piggy-back off of Dr. Oatley's post below. Geithner wants to cap current account surpluses or deficits at 4% of GDP. What effect would that have? Well, U.S. GDP is roughly $14tn. 4% of that is $560bn. In other words, a persistent 4% deficit in the current account is still quite large. Large enough that during most periods the U.S. was well within that boundary, though not during the mid-2000s. As the picture above shows, only in the last few years has the U.S.'s balance of payments been that sharply out of balance. (Note: that is nominal yearly data.)

What's interesting to me about the G20 kicking around these types of proposals are the distributional implications:

Representatives of the world’s largest economies, meeting in South Korea, reached tentative agreement early Saturday on the need to rein in trade imbalances, as part of an American-brokered compromise on calming exchange-rate tensions that have threatened to disrupt the uneven global recovery.

The Obama administration on Friday urged the other economic powers that make up the Group of 20 to agree to curb persistent surpluses and deficits that could contribute to the next financial crisis.

The proposal, which included a numerical limit, was backed by South Korea and quickly drew support from Britain, Canada and Australia. But it met with resistance from Germany and ambivalence from Japan, both major export countries. China, whose currency battle with the United States has threatened to derail the process of global economic cooperation, did not formally weigh in.

So after a marathon negotiating session that stretched into the predawn hours Saturday, the G-20 representatives agreed on the goal of “reducing excessive imbalances” — without a specified limit — and called on the International Monetary Fund to examine the causes of “persistently large imbalances.” The draft statement, to be ratified later Saturday, will also call on countries to “refrain from competitive devaluation” of their currencies, officials said. ...

Four countries have current-account surpluses exceeding 4 percent: Saudi Arabia (6.7 percent), Germany (6.1 percent), China (4.7 percent) and Russia (4.7 percent.) But under the American proposal, countries like Russia and Saudi Arabia that are “structurally large exporters of raw materials” would be exempt from the 4 percent limit, so the pressure would have fallen on China and Germany.

Two G-20 countries have current-account deficits larger than 4 percent: Turkey (5.2 percent) and South Africa (4.3 percent). The United States is next, at 3.2 percent.

A lot of stuff in here. First note that, once again, the expansion of the G7 to the G20 seems to have made it practically impossible to reach meaningful agreements with actionable language. How to reduce these imbalances? Umm... How much should they be reduced? No hard limit. What is the consequence of not reducing imbalances? None that I can see.

Of course the most important thing is who is reducing imbalances. As Dr. Oatley noted, it doesn't matter what countries like Turkey and South Africa do. Nor Russia or Saudi Arabia. It only matters what the U.S., China, and Germany do. The U.S. is under the proposed 4% limit, so is it any surprise that that is the level Geithner picked? It's the number that directly targets China and Germany, and to a lesser-extent Japan. The U.S. is trying to make China, Germany, and Japan pay for international macroeconomic adjustment. No wonder that those countries immediately rejected a firm requirement.

Meanwhile, Justin Fox notes that Keynes proposed something very similar during the Bretton Woods discussions:

Not impossible-to-enforce targets, but a system with incentives built in that would have made big trade imbalances unattractive to both sides. There’s that little matter of creating a new global currency and getting everybody to accept it, but this was at the tail end of World War II. If the U.S. had decreed that the International Clearing Union was a go, the International Clearing Union would have been a go. But at the time, the U.S. ran big trade surpluses and assumed it would do so forever. Its delegates at the Bretton Woods meetings were vehemently opposed. So the idea went nowhere.

Imagine that! Powerful governments decided not to pursue actions that went against their domestic interests. Who could have foreseen it?

The same dynamics are still at play even if some of the roles have reversed, so asking the IMF to investigate causes is a waste of time. China, Germany, and Japan have strong domestic political incentives to pursue policies that generate large current account surpluses. Their political survival depends on continued economic growth, and their economies are so structured that growth has to come largely from exports. The IMF will surely highlight the policies that lead to these outcomes, including exchange rate machinations, but it won't matter because they won't address the underlying political processes that generate the policies in the first place. Even if leaders wanted to bite the bullet and reverse these policies, their domestic constituents wouldn't allow it.

If the U.S. wants to address this issue, it's going to take much more than a vaguely-worded G20 communique. It will have to build a large constituency of other large economies. It will have to find a way to appease Germany and Japan while isolating China. It will have to massively boost domestic savings. And it will have to push a binding agreement through the IMF or WTO. That's a very tall order right now, and I don't see how they can pull it off. As the NYT article linked above notes:

Desmond Lachman, a former I.M.F. official now at the American Enterprise Institute in Washington, praised Mr. Geithner’s message. “It’s a constructive and imaginative proposal and it broadens the discussion away from an exclusive focus on currency to the wider set of policies needed to bring balance about,” he said. “But if you don’t have the Germans and the Chinese, this isn’t going to go very far.”

He added: “They want the U.S. to reduce its deficits, but they don’t want to reduce their surpluses.”

And vice versa.

QOTD

First deputy managing director of the IMF John Lipsky:

“Basel III is microprudential”, said Lipsky, and there’s very much still a need for big-picture cooperation between countries when international financial institutions get into trouble. That said, he was at pains to say that he didn’t want the job: “we’re not supervisors, we’re not regulators, and we do not aspire to be either. We can provide perspective to the standard setters. This will be an agreement among sovereigns.”

At this year's ISA meetings I attended a panel that discussed what sort of new international financial regulatory architecture should emerge from the crisis. The only concrete suggestion (made by Benjamin Cohen) was for the IMF to play a much greater role, the hold-up being that national governments didn't want them to. Well that's true, but as it turns out the IMF doesn't want to either. This is not what the IMF is for, it's not what they're good at, and they recognize that.

The EU (Finally!) Cedes Some IMF Seats to the BRICs

The EU is giving up some of its spots on the IMF board to emerging countries:

Germany, France and Britain have their own seats on the 24-member I.M.F. board, while Belgium, the Netherlands, Spain, Italy and Denmark represent groups of countries, or constituencies. Switzerland, although not part of the Union, also is represented, giving the Europeans a total of nine board positions.

The United States, frustrated at Europe’s refusal to share more I.M.F. power with emerging economies, moved in August to block plans that would have kept Europe’s long-running dominance over the board, which could end in the board being cut to 20 members.

“We agree to reduce advanced European representation by up to two, by offering rotation to emerging markets with advanced countries in their respective constituencies,” E.U. finance ministers wrote in a proposal agreed to on Friday. ...

The current Europe-U.S. domination of the fund is a reflection of its post-World War II setup, but the order is now being challenged by the rise of China and other emerging economies. The I.M.F. board is one of the global lender’s main decision-making bodies. It has approved billions of dollars in emergency loans for countries hit by the global financial crisis and oversees the way the fund is run.

The board overhaul would be linked to a quota shift of at least 5 percent to “dynamic emerging economies and developing countries” and a shift of at least 5 percent from the overrepresented to the underrepresented, the ministers said. ...

The changes would also end the longstanding informal deal that Europe nominates the managing director of the I.M.F. while the United States picks the head of the World Bank.

“The proposed compromise should be understood as a package and as providing a comprehensive and stable solution,” the ministers wrote in the document.

No surprise here. The more the BRICs are willing to contribute to institutions, the more say they'll get in how those funds are used. It should interest some to notice that the US is pushing against the EU for greater inclusion of the BRICs. Would that have been possible a few years ago? I don't think so. If the EU doesn't get its house in order it will continue to lose influence in the international arena.

I await the Vreelander's take on this.

Parsing the IMF PIGS Package

Mark Copelovitch writes about Spain and the IMF, and how his own research sheds some light on these issues, in a guest post at Menzie Chinn's place:

As the Fund's largest quota contributors, the "G-5" countries (the US, Germany, Japan, UK, and France) exercise de facto control over IMF lending decisions. At the same time, the G-5 countries are also home to the largest private creditors in global markets, including the world's largest commercial banks. Consequently, G-5 bank exposure heavily influences these governments' preferences over IMF lending policies. In particular, I find that IMF loan size and conditionality vary widely based on the intensity and heterogeneity of G-5 governments' domestic financial ties to a particular borrower country. When private lenders throughout the G-5 countries are highly exposed to a borrower country, G-5 governments collectively have intense preferences and are more likely to approve larger IMF loans with relatively limited conditionality. In contrast, when G-5 private creditors' exposure to a country is smaller or more unevenly distributed, G-5 governments' interests are weaker and less cohesive, and the Fund approves smaller loans with more extensive conditionality. ...

So, what are the implications for a future EU/IMF bailout of Spain (or Portugal, or Ireland)? Despite the heated rhetoric by Angela Merkel, Nicolas Sarkozy, and others about the need for the PIGS to put their own house in order by imposing staunch austerity measures, we are quite likely to see even stronger support for Spain (and Ireland), given its importance for the profitability and solvency of French and German banks. Portugal, in contrast, is likely to fare worse than Greece, given its limited importance for the major eurozone (and G-5) banking sectors. At the same time, we are also likely to see tensions within the IMF over the size and terms of any contribution to future PIGS rescue packages, given that American and Japanese views about the importance of eurozone bailouts are colored by their own, less extensive, financial interests in these countries. Ultimately, whether the "core" countries in the EU and the IMF view a rescue package as a "bailout" or a worthy endeavor depends not only on whether the borrower in question has been "profligate," but also on their own domestic financial interests and the vulnerability of their own commercial banks to a potential financial crisis.

We've covered similar themes for quite some time on this blog (see, e.g., here), and the way in which domestic political constraints influence the actions of international institutions has been a major theme in IPE for quite some time. It's good to see it get more play in bigger outlets. It's too bad to see Tyler Cowen refer to it as "public choice" rather than IPE, but hopefully this sort of analysis will catch on with bigger blogs and other media outlets, and the profile of the discipline will be raised a bit.

Copelovitch's soon-to-be-released book expands on these themes, and certainly appears to be worthwhile reading.

Is the Subprime Crisis a Transformative Event?

The new issue of International Affairs is out, and is titled "Global economic governance in transition". That is obviously a topic that interests me, so I was happy to find it, and a contributors list including Paola Subbachi, Andrew Cooper, Alexander Payne, and others is more than enough to attract my attention.

I'm still working my way through the articles, but I did want to highlight Eric Helleiner's contribution, "A Bretton Woods moment? The 2007-2008 crisis and the future of global finance." (Ungated pdf here.) Helleiner argues that those expecting the 2007-2008 crisis (which did not end in 2008 and still has not) to be a transformative moment spawning a new global order to be disappointed. But this is not because the system is irredeemably controlled by bank lobbyists, or obstructionists in Congress, or Chinese planners, or recalcitrant Greeks. Rather, it's because Bretton Woods itself was not a moment, but a process:

The success of the Bretton Woods conference was a product of a remarkable combination of concentrated power in the state system, a transnational expert consensus and wartime conditions. The absence of a similar political environment today makes its accomplishments very difficult to replicate. Even more important, the significance of the Bretton Woods conference itself should not be overstated. Not only did the innovative aspects of the conference agreements have long historical roots, but the implementation of the agreements after the conference was a troubled and painstaking process. The creation of a new international financial system, in other words, was not a product of that single meeting but rather the outcome of a much more extended historical process. The importance of this analytical point is brought out even more clearly when we examine the successor to the Bretton Woods financial system—what I call the ‘neo-liberal globalized’ financial regime—which emerged through a process with no clear foundational moment.

Helleiner identifies four phases in the process of change of governance structures: a legitimacy crisis, an interregnum, a constitutive phase, and an implementation phase. He claims that the global economy is currently in the interregnum, and a new global order could yet emerge. Helleiner argues that the subprime meltdown and ensuing policy responses have destroyed the legitimacy of the 'neo-liberal globalized' financial regime based on the Anglo-American model. Interestingly, he argues that the legitimacy crisis did not arise because of the crisis itself, but rather the responses of governments to it:

The fact that US and British policy-makers have responded to the crisis in a much more interventionist way than they recommended to East Asian countries during the 1997–8 crisis has undermined their credibility abroad. Since this crisis originated in their own markets, US and British policy-makers can no longer offer up their own regulatory practices as a model. As one Chinese official recently put it, ‘We used to see the US as our teacher but now we realise that our teacher keeps making mistakes and we’ve decided to quit the class.’

I have heard this claim quite -- that the Anglo-American economies were more interventionist in 2008 than the Washington Consensus proscribed for East Asia in 1997 -- a lot in the past few years. (I recall Emmanuel making it, for example, tho I'm too lazy to dig up posts right now.) It's always struck me as completely wrong-headed in two ways: first, it assumes that the Anglo-American economies were anti-interventionist; second, it assumes that the East Asian crisis and the subprime crisis are similar events.

It doesn't more than two seconds of thought to realize how absurd these claims are. On the first point, as Joshua Green's recent profile of Timothy Geithner (discussed here) emphasizes, large intervention in financial crises has be the modus operandi of the U.S. for quite some time. Green emphasizes the experiences of Geithner and Summers in the Mexican crisis in 1994 and the Asian crisis in 1997 in formulating this instinct, but the pattern is more entrenched than that: the U.S. has not hesitated to intervene in financial markets during panics since the Great Depression.

Which brings us to the second point, which is that the Asian financial crisis and the subprime crisis are not remotely similar. The former was a currency/balance of payments crisis, while the latter was a banking crisis*. Asian countries in the late-1990s had very different economies than Atlantic countries in the late-2000s. Why in the world should we expect the same reaction to different types of crisis in different countries? And why in the world does divergent responses to these crises represent a loss of legitimacy? Wasn't the big criticism of the Washington Consensus its "one-size-fits-all" ideology? If the Asian crisis had been a banking crisis, and if Asian governments had responded by bailing out their banks, does anyone think the US/UK/IMF would have been critical of that policy?

In fact, the Atlantic economies have been very consistent in their policies: they intervene when necessary to support their financial firms, boost their economies, or protect their investments. The conditionality attached to IMF loans given to Asian countries didn't exist because the Atlantic economies wanted to be mean to Asian upstarts, but because they wanted their money back. And here's why this was necessary: because unlike the US and the UK, Asian economies could not borrow in their own currencies, nor could they borrow from private markets at less than pecuniary rates. More developed economies can do those things, and when they can't they face fairly significant austerity as well. Witness Greece.

So no, I don't think the subprime crisis represents the beginning of a transformative process, according to Helleiner's own typology: if there is no crisis of legitimacy, there can be no interregnum. Whether the EU crisis eventually does remains to be seen, and in my opinion it represents a much greater chance**. What the Atlantic economies have done in this crisis is combine the monetary lessons from Friedman with the fiscal lessons from Keynes in pretty much textbook fashion. I'd hardly call that a paradigm shift.

*The Asian crisis eventually led to the collapse of LTCM... which caused the U.S. government to intervene in financial markets. I.e., the US reacted the same then as it did now: it protected its firms when their collapse would have broad systemic consequences.

**I don't necessarily consider the subprime crisis and the EU sovereign debt crisis to be two separate events, but I do think they have very different implications for global governance.

Parsing the Euro Bailout

Well. The much-anticipated Euro bailout plan has been revealed, and it's impressive: just short of $1tn, $625bn of which comes from Euro governments, and the rest from the IMF*. Why so large?

Officials are hoping the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.

Yes, that's part of it. But the reason why TARP was so big was so that it wouldn't actually have to be. In other words, the U.S. government hoped that by making an enormous commitment to secure illiquid/insolvent institutions that were susceptible to runs, it would prevent those runs from even occurring, thus saving the actual financial commitment in the long run. To some extent this happened, as only about half of TARP's funds were ever disbursed (even after extending loans to non-financial firms, like the auto makers). I'm sure that Euro governments are hoping for the same thing; if the commitment is perceived as being sincere, then part of the follow-through may become unnecessary.

Euro governments aren't the only ones hoping to instill confidence:

Underscoring the urgency of the situation, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence. And in a sign of the spreading anxiety, the United States Federal Reserve, along with the European Central Bank and the central banks of Canada, Britain and Switzerland, announced the establishment of instruments known as swap lines. The swaps are intended to ease pressure on European banks and money markets by providing more liquidity. ...

The actions by the United States represented significant concern that the European crisis could spill over and hinder the American recovery.

Why might that be? Well, who owns all the sovereign debt of Greece and the other PIIGS? Already-weakened banks in the U.S. and Europe. U.S. banks are exposed to European banks to the tune of $3.5tn (yes, trillion), and if Greece or any other countries default, those European banks will go under and take U.S. banks with them. Obviously that can't be allowed to happen. The recent ratings downgrades of Greece's debt have already dealt a blow to banks' capital ratios. A default or restructuring would be devastating.

But this new bailout cash has only been pledged, not actually raised, so here's what I'm going to be watching over the coming days:

In a statement after their meeting, the ministers emphasized that the [funds] would expire after three years and that its use would be strictly dependent on “national constitutional requirements.”

The language most likely reflected the reservations of some governments to providing even more money than is available in bailout packages already approved.

Remember that TARP did not pass the House the first go-round. Europe now has to pass several of them in several different countries. There are strong domestic political pressures in some countries (notably Germany and Britain) to not bail out the PIIGS at all, and it might be very difficult to muster enough domestic support to actually procure this huge level of funds. Perhaps more distressing is the fact that Greece could end up defaulting anyway because of domestic politics there. A lot of national polities have to play ball in order for this to work the way it's supposed to work, and I'm not sure whether that will actually happen.

One thing is clear: one way or another, the eurozone will never again be as it was from 1999-2009. The mandate of the ECB is already shifting, the likelihood that one or more countries will leave the monetary union is still somewhat high, and the rise of economic nationalism throughout the zone indicates that there is less camaraderie than previously thought. Something's gotta give.

*Presumably the IMF funds will also be coming from Euro governments, although I'd be interested to see if that's actually the case. How will voters respond if the U.S. is spending $100bn to bail out Europe? Not well, I imagine.

More on the (Lack of an) Anti-Globalization Movement

Well. I type up a late-night blog post to give myself a temporary break from paper-writing, and wake up to find it the weekend topic du jour in the IPE blogosphere.

First, Drezner builds me up ("rising young blogger"... I'm not that young, and not rising that much either) before tearing me down:

Hmmm.... no, I don't think Winecoff is correct. Even if it's true that the kids today care more about environmental degradation than labor abuses, this shouldn't stop them from protesting at economic summits. Indeed, from the mid-nineties onwards, protests against labor and emvironmental abuses have gone together like racism/sexism/homophobia accusations.

Also, I would dispute the empirics of Winecoff's assertion. The protests didn't die out with the change in the decade -- they were pretty robust at G-8 summits in the first part of the naughties, as well as the 2003 Cancun WTO Ministerial and the 2005 Hong Kong Ministerial. This is a more recent phenomenon.

If I'd done a better job of anticipating criticisms I would have addressed Drezner's first point ahead of time. Of course I agree that protests against labor and environmental practices often go hand-in-hand, but that's because protestors often see both of those issues as symptoms of a bigger disease: globalization forces developing countries into a race-to-the-bottom that erodes labor and environmental standards (and erodes cultural diversity and norms of reciprocity, etc.).

(An aside: those sorts of protests have generally be focused at the WTO and G-8/20. The IMF doesn't have anything to do with environmental politics, and the proximate cause for this discussion is an IMF protest.)

However the focus of environmental activists in the recent past has not primarily been about how globalization leads to race-to-the-bottom dynamics in the developing world; instead, it's been about how to convince national governments and their citizens in the developed world to agree to reduce carbon consumption. The WTO doesn't have much to do with this, although it eventually could if nations start slapping carbon tariffs on each other. But a prerequisite to that is getting national governments to agree to meaningful cap-and-trade regimes or carbon taxes, so activism has shifted to the national level for the time being.

As to my "empirics"... I don't have any. It was just a casual observation, and I didn't mean to imply that there was a strict shift in protest activity from "Tons" to "None" around the turn of the millennium. Merely that anti-globalization protests have tapered off over the past decade as the institutions associated with globalization have been less active. I still think that correlation holds pretty well, and it's even pretty consistent with what Drezner says. I think he's completely wrong about his Business Cycle Theory of Economic Protests, however:

During boom times, antiglobalizers score political points by stoking fears of cultural debasement and environmental degradation. During leaner years, naked self-interest becomes the salient concern: in the current economic climate, American opponents of globalization talk less about its effect on the developing world and more about the offshore outsourcing of jobs.

First of all, there's nothing in that that suggests that overall protests against globalization should decline during lean years, only that the anti-globalizationists should be complaining about slightly different things. In fact, we've seen an uptick in protest activity in the U.S. since the financial crisis, as we should probably expect. It's just that they're not complaining about globalization because the IMF/WB/WTO are not perceived to have had much to do with the current crisis. Instead, focus has shifted to other issues like deficits, health care, and corporate welfare.

Simon Lester agrees with my earlier point that there are fewer globalization protestors because there is less to protest about: the WTO, IMF, and WB have been much less active in recent years than they were in the 1990s. He also suggests that some protestors may have switched from anti-globalization to anti-war, and Stephanie Carvin pops up in comments here to say something similar. This makes a lot of sense to me (although those protests have also mostly dried up too, in the States at least; Carvin suggests they are alive and well in Europe).

It also backs up what was my original point: protestors have one-track minds. If they're focused on the war in Iraq then they aren't focused on labor rights in Latin America. If they're focused on getting the U.S. government to institute a cap-and-trade regime then they pay less attention to the World Bank subsidizing undemocratic governments. And if the IMF hasn't done anything onerous in a decade, then there just isn't much to protest.

I don't think this is permanent. I think protest activity changes with events. If we end up getting a wave of sovereign debt crises, and the IMF imposes austerity as a condition of loans, then we'll likely see IMF protests pick back up. If Doha ever moves towards completion without environmental protections built in, then we'll likely see more anti-WTO protests. But right now those issues just aren't very pressing, so protestors have moved to other things.

Now This Is How You Do Journalism

I spend more time bashing bad press work than praising good. I don't know if that's because there isn't very much good stuff, or because I'm mean-spirited, but today I can happily praise this article on Greece and the IMF by Sewell Chan and Liz Alderman of the NY Times. Let's parse it a bit:

In the last two days, Greece’s finance minister has threatened to turn to the International Monetary Fund for a bailout if Chancellor Angela Merkel of Germany and other European politicians resist pledging aid to help Greece cope with its newfound frugality. Asking the fund for help could create a new round of financial and political turmoil by sending the message that Europe cannot resolve its own problems, analysts said.

“It would be damaging for the euro zone going forward because it would sow seeds of doubt about whether this is really a currency union, or just a group of countries that share a currency,” said Simon Tilford, the chief economist of the Center for European Reform in London.

Good, quick summary of the issue, similar to the take I've been taking recently (see here and here for examples, and Dr. Oatley's take here). It frames the issue appropriately: this is not (just) about what Greece has to do about its debt; it's a political issue about who pays for maintaining a non-optimal currency zone. Next we get details about what that political fight is about, and what the stakes are:

Policy makers and leaders of many countries that use the euro see Greece’s troubles as a problem within the family. They want a homegrown political solution to show that Europe can fix internal economic crises without outside help.

Turning to the I.M.F., which often helps struggling emerging-market nations, is seen as a stigma that is to be avoided, a concern underscored by the European Central Bank’s president, Jean-Claude Trichet, on Wednesday. “I do not trust that it would be appropriate to have the introduction of the I.M.F. as a supplier of help,” he said.

No member of the euro zone has had to borrow from the I.M.F. since the official use of the common currency began in 1999, and no major industrialized country in Europe has done so since Britain in 1976.

But from Greece’s perspective, the I.M.F. would force the government to swallow nearly the same bitter medicine that Germany, France and others have required — but at least Athens would receive guaranteed financial aid from the I.M.F. in return.

In addition, it is not clear that Germany and other European governments seeking to contain the crisis have the resources or expertise to monitor Greece and other profligate euro members for the many years that it will take for the troubles to blow over.

Again, very well said. But even better... the journalists actually talked to some people who know some things about the political economy of the IMF, and named them by name! None of this "some economists say" or "many economists believe" nonsense: get good sources, tell us who they are, and let them say what they mean. This article enlists Randall Stone, Kenneth Rogoff, James Vreeland, Michael Mussa, Mark Copelovitch, and Simon Johnson (among others). That's a strong roster! I don't want to quote all of what they all said for space reasons, but the quotes are used well and impart useful information to readers who may not have a strong knowledge background in these topics. I do want to highlight one part from Copelovitch, tho:

The biggest challenge is in Germany, which has historically tended to enforce fiscal and economic rectitude on its neighbors. Many German taxpayers are vehemently opposed to paying for the profligacy of their free-spending neighbors in Greece and other southern European countries that let their deficits soar sky-high instead of taming them when times were good.

At the same time, German banks also underwrite much of the Continent’s debt and exert considerable influence in domestic politics, according to Mark S. Copelovitch, a political scientist at the University of Wisconsin, Madison. Germany “doesn’t want its banking sector to go under because Greece has defaulted,” he said.

A-ha! Here we have more politics: German citizens don't want to pay for Greece's profligacy, but German leaders don't want to sacrifice the German banking sector (which has underwritten or purchased a lot of Greek debt) to prove a point.

The article closes by talking about the personal/political rivalry between Sarkozy and IMF head Strauss-Kahn as another complicating dimension. It's a very good piece, and I commend Chan and Alderman on their work. They convey a lot of meaningful information in 1000 words, and make use of very good sources. Please read the whole thing.

Who's Afraid of the IMF?

Emmanuel notices that multilateral lenders-of-last-resort are popping up in Europe and Asia, and wonders: why not scrap the IMF? A European lender could tailor its policies to European needs, by surveilling compliance with the Maastricht criteria, for example. Emmanuel also notes that European countries rarely have balance of payments problems, which is the ostensible purpose of the IMF. The Vreelander sees the move from international to regional multilateral institutions as just another sign of the times:

The European Monetary Fund is less of a big deal. In the 1950s, 60s, and 70s, European countries borrowed from the IMF and had to accept the conditions attached. With the United States as the largest shareholder of the IMF, this gave our country some influence over policy in Europe. But Europe turned away from the IMF a long time ago. With Greece flirting with the idea of turning to the IMF for a loan, Germany and France are moving to make the divorce more final; Europe will deal with European monetary affairs.

But this European monetary move adds impetus to other regional organizations, like the Chiang Mai Initiative for Asia, and the Banco del Sur for South America. Global governance going forward will be increasingly based along regional lines. The United States will no longer have as much influence - neither directly, nor through its influence at the IMF.

So, the United States needs a new leadership style. We should continue to invest regionally, promoting our relations with neighbors, Canada and Mexico. And we should look to lead the world by engaging multilaterally. The days of effective US unilateralism are over. Cooperation with friends is the key moving forward.

I agree with the general sentiments expressed by both, but I think we can go a little deeper as well. There is a lot of research supporting the claim that the U.S. influences the size and type of IMF lending. E.g., this paper by Oatley and Yackee argue that countries allied with the U.S. get larger IMF loans, this paper by Randall Stone argues that U.S. allies can (sometimes) leverage that relationship to receive fewer conditions on their loans. If the goal is to decrease the influence of the U.S. and increase the influence of local/regional governments, then these patterns of increasing regionalization make sense.

But there is also another dynamic (other than the fact that the ASEAN+3 and eurozone are not the whole world) at play that suggests that the IMF will be around for quite awhile: it can provide needed political cover for leaders to enact unpopular reforms. This is especially true if the IMF is controlled by the U.S. Let's think about the Greece situation in this way: if Greece installs an austerity program in exchange for loans from Germany, then voters who dislike the plans in Greece and Germany know exactly where to aim their disapproval: incumbents. But if Greece is required to install an austerity program in exchange for an IMF loan -- even if the IMF loan is funded by Germany -- then domestic political leaders can argue that they had no choice in the matter: the Big Bad IMF made them do it. In this case, as it often is, opacity is a good thing for leaders enacting unpopular reforms, and including the IMF can muddy the water.

(Note: Vreeland has a paper on this topic, which he forgot to cite in his post. Blogging is all about self-promotion, James! Don't make me do your laundry for you.)

Now, it appears that Germany wants to make the domestic political costs for needing debt bailouts very high. In other words, Germany doesn't want to provide any political cover for Greece, for fear that if there are no consequences for being profligate then they'll just go back to profligacy. If this is true, then the political cover dimension of the IMF is a very strong reason to want to move policy away from that organization, since the "political cover" aspect of the IMF is essentially encouraging moral hazard. But there are potentially very high costs for German leaders as well: I doubt that German voters appreciate having to bail out foreign governments during an economic downturn. If leaders in Germany are punished for spending German funds to keep Greece (and Portugal, and Spain, and Ireland) afloat, then I think we'll see those nations scrambling to re-strengthen the IMF. The unpopularity of the IMF can actually work in the Fund's favor, in this case.

The takeaway? The U.S. may not able to act be able to act unilaterally as much anymore, but that does not guarantee that global governance must become more fractured. There may be political incentives to keep international organizations international, rather than regionalizing or localizing them.