Europe holds out against reform of IMF

By Eoin Callan in Washington

Published: August 6 2007 22:03 | Last updated: August 6 2007 22:03

The board of the International Monetary Fund is bitterly divided over proposed reforms to give more votes and influence to fast-growing economies such as China at the expense of European countries, according to people close to the board.

European members, led by France, Germany and the UK, are refusing to surrender power they have held since the fund was created after the second world war, senior IMF officials said.

The rift makes it more likely that Dominique Strauss-Kahn, the French candidate for managing director, will inherit an unreformed boardroom if he is appointed.

The split pits Europe against the US and middle-income nations over a host of competing internal proposals due to be agreed next month to give more say to advanced developing countries, such as India and Brazil, based on the size of their economies.

“What we hear from European colleagues [is] that they have the right of birth to run this institution indefinitely. This is very disappointing,” an executive director told a crunch board meeting last week.

London and Paris have rejected formulas for awarding votes that would pave the way for Beijing to overtake them in influence at the IMF and would strip Amsterdam and Brussels of their leading positions on the board, officials said.

“The UK, France and, to a lesser extent, Germany, have dug in their heels. Japan also fears being eclipsed by its Asian rivals,” a senior IMF official said.

The impasse could worsen the crisis of legitimacy for the IMF, as its structure and policies increasingly come under fire and emerging markets look elsewhere for credit. Outstanding credit fell to $20bn (€14.5bn, £9.8bn) last year from about $100bn in 2003, a drop critics say reflects distrust of the fund.

Rodrigo Rato has pledged to advance voting reforms demanded at a pivotal summit last year before he steps down as managing director in October, but needs 85 per cent support. The fund plans at least one more board meeting before its annual meeting in the autumn.

“Rato doesn’t have the votes,” said a person close to the board.

Allies of Mr Strauss-Kahn say the veteran French politician has the diplomatic skills to broker a rapprochement. But there is some hostility to his candidacy.

Europe is proposing that the amount of available votes be increased by 6 per cent and the extra votes shared among under-represented countries, meaning its current total of votes would not be reduced.

The US is “annoyed with the Europeans’ intransigence”, a person familiar with the negotiations said, and is urging a quick compromise along the lines proposed by Canada that would see more votes go to the four most under-represented nations: China, Mexico, South Korea and Turkey.

Washington has strong alliances with Seoul, Ankara and Mexico City and a vested interest in Beijing becoming more engaged. It wants the IMF to pressure China into changing its currency policy.