In recent years the IMF has made efforts to build an improved “crisis prevention and resolution framework” that minimizes the size and frequency of bailouts, largely out of a concern with the possible moral hazard consequences of its interventions. This framework, however, which includes an emphasis on greater private sector involvement, the encouragement of the use of collective action clauses and a more effective enforcement of access limits to IMF lending has not generated an observable change in practice. The institution may be trying to achieve an almost impossible objective: imposing more stringent criteria to constrain its intervention capacity without recognizing that such an approach is ultimately inconsistent with the IMF’s intrinsically political nature. This is clearly evidenced in the cases of countries that have to restructure their debts. The failure of the SDRM project reflected, among other factors, the prevailing view in the US administration that market forces should be relied on to find an “solution” in these situations almost on their own. But this has in practice meant that the IMF relinquishes its potential contribution to improving the result of sovereign debt restructurings. In fact, the IMF has frequently exerted pressure on the debtor and its views have often been biased in favour of the creditors’ interests. In particular, its lending into arrears policy (LIA) has been used as a means to induce debtor governments to “accommodate” to these interests. But by providing financing to the debtor through its LIA policy the Fund could potentially play a positive role in reducing the gap between the creditors’ “reservation price” and the country’s repayment capacity while, at the same time, making sure that the debt burden becomes sustainable. In this way, both debtor countries and its creditors would be better off. However, the Fund should not support “market-friendly” sovereign debt restructurings that are incompatible with sustainable debt paths and may represent a greater risk for its resources than more “coercive” alternatives. Indeed, the paradox is that “investor friendly” debt restructurings represent quite the opposite of a market outcome: they require active and often massive IMF interventions and the level of the resulting haircut is suboptimally low.

In the past several years, much has been written about the need for major governance reform of the Bretton Woods institutions whose representation structures are outdated and no longer accurately reflect the distribution of power in the global economy. Discussions in advance of the autumn IMF/World Bank annual meeting to be held in Singapore have been strongly focused on the issue of quota reallocation, with a well articulated US preference for a reallocation of votes towards some large emerging market countries at the expense of European representation. European member states are currently represented in ten different constituencies at the board of directors and account for a large number of executive directors. Thus, authors and policy makers writing on this topic have previously focused on the ‘problem’ of European representation and see a combination of European seats a ‘natural’ way to change representation in favour of developing countries.

European countries do not share this view, both because individual countries fear losing power in a single seat system, and because there is relatively limited appetite in Europe at present for coordination of development and financial policy. Despite this negative outlook, there are some European countries which may be natural ‘champions’ of rationalisation of European voice. Thus, this paper will examine both the positions of individual member states on the topic of European coordination by analysing internal and external pressures for embracing governance change, as well as identifying windows of policy opportunity that exist in the coming period to achieve change. It will suggest that the sequencing of US pressure for quota reallocation is poorly aligned with European priorities, and that waiting even a relatively short period of time (e.g. less than one year) would make it easier for a more substantial realignment of European representation and therefore global governance reform.

The paper discusses the trends of recent global imbalances and the financial flows that sustain them, as well as the associated risks with regard to international financial stability and worldwide economic growth. It considers the responsibilities of the IMF surveillance in their correction under Article IV of the Articles of Agreement.

The paper analyzes the likely impact of a potential dollar crisis on developing countries through a reduction of capital flows, increased interest rates and higher spreads on debt service and on their access to and cost of borrowing. The impact of a crisis on their export revenues is also considered. In this connection, the paper assesses the Fund’s likely response to a dollar crisis, and considers the Fund’s most constructive possible response consistent with its purposes.

The paper discusses the Fund’s potential role in dealing with global imbalances in the light of the Articles and of the Fund’s own history, particularly the precedent set by the Oil Facility of the mid-1970s. The paper suggests the establishment of a counter cyclical facility to deal with exogenous shocks to assist developing and emerging countries.

In order to reduce the risks and the deflationary impact on the international economy of a reduction is US aggregate demand, the paper proposes a coordinated approach to the management of the global economy and the correction of global imbalances by the largest 20 economies with the Fund’s technical support.

Over its existence the IMF has been an instrument with multiple objectives. The main objectives have been (a) surveillance over countries’ economic policies; (b) occasional provision of financial resources for countries undergoing adjustment under a Fund-supported program; (c) technical assistance for structural reforms and for institution building; and (d) “certification” over some desirable actions by counties. Over the years, some of these activities became more important than others. In the 1980s and 1990s for example assistance for structural changes and for institution building became important. After the 1997-98 financial crisis, certification for desirable standard and codes and for provision of particular data became important. To remain “universal” and useful to all its members the Fund must continue to promote multiple objectives. It cannot become a one purpose institution.

The Fund is now criticized for its limited role with respect to global imbalances which have become very large in connection with a few major countries such as the United States, China, and Japan. Fund surveillance is still bilateral, i.e. directed at single countries. Thus critics are demanding a larger role in multinational surveillance. However, multilateral surveillance is not likely to be very successful because of technical, organizational, and political obstacles. Some changes would, however, make the Fund more effective: the quotas assigned to the countries could better reflect their current economic power; some expansion in multilateral surveillance work should be planned, possibly by bringing fresh blood into this activity from outside the Fund; the Management and the staff should be instructed to be much more focused or even blunt in their views on countries’ policies; the resources available to the Fund should be increased and the executive directors should be more independent from the countries that nominate them. It would however be a mistake to redirect on a large scale the resources of the institution toward an activity with a very slim chance of success.