It was during the South Sea bubble that someone set up “a company for carrying out an undertaking of great advantage, but nobody to know what it is”. That stock promoter in 1720 raised £2,000 and then did a runner to France.
Christine Lagarde is not going to make off with the $430bn-plus in new resources that she has just collected for the International Monetary Fund, and there was general agreement about the “great advantage” to raising them. It was less obvious, however, for exactly what undertaking these funds are destined.
The extra IMF resources brought a pleasing sense of activity to the spring meetings of the World Bank and Fund. Tricky international negotiations were orchestrated over the course of a month; power plays attempted; and finally everyone gathered in a room where deals were done. The end result was a large number and clear international action to set against the new round of market jitters in Spain.
Listening only to the official rhetoric, however, it would be hard to work out why the $430bn was needed. The official line is that extra IMF money has nothing to do with Europe. “Those bilateral loans which are to be drafted and signed from now on do not form a special pot of funds or coffers that would have an EU label on it,” said Ms Lagarde. “It is for all members of the IMF.”
That is true – although the majority of the extra money came from Europe, there would be little need for extra IMF firepower if there were no fears about the eurozone, and the rest of the world pointedly tied the IMF resources to an increase in the eurozone’s own firewall.
Large emerging economies were understandably reluctant to provide large sums of money to back up some of the richest nations in the world – nations that have disproportionately large voting weight at the IMF – but went along, in the end, because market turmoil harms them as well. They extracted a beefed-up pledge on reform to voting quotas at the Fund.
The real question, however, is under what circumstances and conditions the extra funds would be lent to a large European country that lost market access for its debt. Simply having the money available to the Fund does not make it credible as a firewall for Europe unless the will is there to use it.
Several countries made it clear that, if and when that debate has to happen, it will not be easy. Jim Flaherty, Canadian finance minister, said that non-eurozone countries should have a veto over further IMF loans to the continent. “We ought to have two keys in effect,” he said. “We would have one vote by eurozone countries and another vote for approval by the non-eurozone countries.”
If it did become necessary to launch further IMF programmes in the eurozone the fundamental concern would be confidence that the money would be paid back. In a standard IMF programme, it sets conditions around fiscal discipline and structural reform, to make sure that a currency devaluation is not frittered away and instead returns a country to a sustainable position where it can pay down its debt.
The eurozone has no option to devalue, and everything rests on structural reforms to drive down costs in southern Europe and regain competitiveness. The success of that process is so uncertain that officials outside the eurozone quietly wonder about what conditions the IMF could impose that would give it some assurance of safety.
Signs are emerging that eurozone officials recognise the problem and are trying to generate confidence that their campaign of internal adjustment will work. “These efforts are already delivering. We are witnessing clear signs of adjustment of imbalances and divergences of competitiveness across the euro-area,” said Olli Rehn, the European Union’s commissioner for economic and monetary affairs. The question is whether those divergences would re-emerge if southern European countries returned to full output.
Unless the eurozone can provide a clear answer then exactly what can be undertaken with that extra $430bn is likely to remain unclear as well.