IMF managing director Christine Lagarde and ECB president Mario Draghi at a news conference in Nicosia, Cyprus in this photo from Sept. 14, 2012.ANDREAS MANOLIS/Reuters
The Harper government's opposition to boosting IMF resources earlier this year was based on two principles. The first was that Managing Director Christine Lagarde's effort was little more than a backdoor bailout of rich European countries. The second was that the fund's decision to play a secondary role in the rescues of Greece, Ireland and Portugal had created a dangerous precedent that left the fund less able to guarantee the contributions of its non-European members.
A new IMF report shows there was reason to worry about the second; although you can be forgiven if this is the first time you've heard much about it.
Explaining how the "troika" system that was adopted to administer the euro zone bailouts weakens the IMF's ability to hold countries to account doesn't create the right echo in the House of Commons during Question Period.
Better to justify the decision as taking a stand against "sumptuous euro welfare state countries and the wealthy banker that lend to them," as Conservative member of Parliament Pierre Poilievre put it back in June, according to this article.
This always was a weak argument, akin to watching your neighbour's house burn because he or she indulged in lighting too many aromatic candles. While forceful when articulating their principles, Canadian officials struggled with a more pragmatic question: does the IMF need the money to do its job? Almost 40 countries decided the answer to that question was "yes." At the Group of 20 Summit in Los Cabos, Mexico in June, Ms. Lagarde announced contributions of more than $450-billion (U.S.).
Canada, a long-time supporter of multi-lateral efforts, continued its stubborn refusal to join up. It's hard to imagine this hasn't hurt Canada's reputation. Former prime minister Paul Martin last week said during a live Skype interview with The Globe and Mail that Canada "has not played an important role in the G20," and describing the decision to oppose the IMF's fundraising drive as a real problem.
Finance Minister Jim Flaherty always said Canada wasn't as isolated as it appeared. Many countries agreed with Canada's characterization of the situation, he said, and appreciated his vigorous dissent. Mr. Flaherty made this claim with little evidence. In fact, as more and more countries tossed billions into Ms. Lagarde's hat, the Harper government came to look childishly obstinate.
However, there is some new evidence that Mr. Flaherty's issues with the "troika" system are shared by the IMF itself. On Monday, the fund released a broad review of its lending programs, a dense commentary on what's working and what isn't. Within in those many pages is an acknowledgement that it's been difficult working out rescue packages for Greece, Ireland and Portugal with the European Central Bank and the European Commission at the table.
Having to co-ordinate with the ECB and the commission "has functioned well operationally and improved over time, but it nevertheless added an additional layer of complexity to conditionality design and decision-taking processes," IMF staff said in the report. "Institutional constraints in the (euro zone) occasionally limited alternative policy options that could otherwise have been considered – notably, debt restructuring to strengthen debt sustainability." (Bloomberg News wrote a nice précis of the report here.)
Until the European debt crisis, the IMF was the singular heavy. It would use its members' money to rescue troubled countries, but only after negotiating with that country's finance ministry and central bank on the types of policy changes that would be required to get the loans.
Dealing with the euro zone complicates matters. Greece, Ireland and Portugal have national central banks, but it's the ECB that sets monetary policy. But the ECB is part of the troika that is in charge of the rescue. Arguably, that puts the ECB on the wrong side of the negotiating table. In another situation, the IMF might demand more from the central bank. But that becomes difficult when it's the central bank that is leading the rescue.
The IMF report suggests the troika found a way to make it work. But it seems likely that the fund will take a different approach to working with a currency zone like the euro area in the future. Canada, certainly, will be demanding it.