It was the Chinese philosopher Lao-tsu who reminded us that a journey of a thousand miles begins with a single step. Now European countries have taken a first step toward rationalizing their representation on the executive board of the IMF. Two small European countries, Belgium and the Netherlands, will henceforth rotate as occupants of chairs with large emerging-market co-constituents like Turkey and Poland. The number of European representatives on the Fund’s 24-member board, previously as many as nine, will now fall, and, depending on rotation, the number of emerging market representatives will rise.
But it doesn’t help that these concessions were made grudgingly. They are also weak soup. Having Poland and Turkey periodically rotate onto the board will do little to address the belief in the developing world that decision-making in the IMF is fundamentally dominated by the advanced countries. It will do nothing to streamline decision-making in what is an awkwardly large governing body.
The obvious solution would be to consolidate European representation into two or three chairs. One scheme would be one chair for the euro area and another for other European countries. Alternatively, in addition to one chair for the euro area there could be a second chair for the rest of the EU and a third for non-EU European countries. The board could then be shrunk to a more tractable size. And more space at the table could be made available to developing countries.
These more radical reforms would have been in the interest not just of the developing world but of Europe itself. European resistance to consolidating its representation in the Fund is embarrassing at a time when the EU and the euro area are working to strengthen their internal governance. European countries are seeking to speak with one voice on their own internal fiscal, financial and financial policies by assigning more powers to the European Commission and the ECB. To speak in a cacophony when they show up in Washington is a fundamental contradiction. It damages the credibility of efforts to demonstrate EU solidarity, whether to other governments or to financial markets.
In addition, research – including research by economists high up in the EU hierarchy – demonstrates that Europe can advance its interests more effectively when it speaks with one voice. In theory, nothing prevents European directors occupying as many as nine seats on the board from singing in harmony. But in practice, things aren’t so easy because some European directors represent constituencies with non-European members. Spain, for example, continues to cohabit in a constituency with various Latin American countries. Precisely in order to make its views heard, consolidation is in Europe’s own interest.
But the most important reason this change is in Europe’s interest is that it is inevitable. Belgian officials understand that a situation where they, rather than their Turkish colleagues, chair their constituency is unsustainable. Resisting the inevitable only buys enmity for the incumbents. It does not enhance their diplomatic leverage.
What about the argument that small European countries chairing constituencies will be reluctant to give up their only remaining seats at the global policy table? The answer is that the IMF executive board is not, in fact, their only remaining seat. These smaller European countries are well represented on the Basel Committee on Banking Supervision, the Financial Stability Board, and other organizations concerned with financial regulation. This is where they belong since, while they lack their own national monetary and exchange rate policies, they still have their own banking systems and financial regulation. It is in Basel and not on 18th Street where they are appropriately seated.
There is of course the related question of the US veto over major constitutional changes, and whether Europe should withhold further concessions contingent on the US agreeing to sacrifice its veto power, as German finance minister Wolfgang Schauble seemed to suggest at one point. This could be done by reducing the threshold of votes required to less than 85%.
Reform along these lines is entirely appropriate for a more multipolar world like the one in which we increasingly live. But the Europeans also possess a veto, and the same logic that implies sacrifice of the US veto suggests that the problem of Europe’s veto should be addressed as well. This makes clear that the issue is separate from the number of European seats. It is not clear why the veto issue and reconfiguration of seats should be linked unless the whole point is to slow the course of reform.
There is another Chinese proverb which says: do not anxiously hope for that which is not yet come; do not vainly regret what is already past. Regrets notwithstanding, it is past time for Europe to move on.
Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.