Hamish McRae: Now is the opportunity to have a well-run, apolitical and authoritative IMF

Economic Life: There are other European candidates to head the IMF, though for obvious reasons Gordon Brown is not one

There is a "who should do it?" question and a "what should it be doing?" one. The fact that the International Monetary Fund should have suddenly to find a new managing director has set the capitals alight with speculation as to the first question but the second is the more important.

Click HERE to view graphic (221k jpg)

The "who?" raises an issue that has been simmering for some time but has now come out into the open. By tradition, ever since the IMF and the World Bank were founded after the Second World War the head of the former has been a European and the latter an American. There was a powerful rationale for the latter, for the World Bank or to give it its full name, the International Bank for Reconstruction and Development, was originally created to help finance the reconstruction of war-shattered Europe – with most of the initial funding coming from the US.

The fund, on the other hand, was only intended to make short-term loans to help countries in balance of payments deficit adjust their economies without having to resort to trade restrictions. It was quite reasonable that an organisation with this more limited role should be headed by a European, despite the weak financial position of the whole of Europe at that time.

But of course the world has utterly changed since those early years. It is not just that the fixed exchange rate system gave way to floating rates, but the balance of the world economy has shifted away from the old developed world to the new emerging one. The idea that the two top official jobs in international finance should be shared between the US and Europe has become open to challenge. It may be that this practice will be sustained for just one more time, with the most obvious candidate being Christine Lagarde, who is generally admired for the way she has handled the job of finance minister in France. As a further bonus, she was a member of the French synchronised swimming team, so she knows about self-discipline, a quality that after what has just happened would be most helpful.

There are other European candidates, though for obvious reasons Gordon Brown is not one – it is bit embarrassing, given both what happened in Britain and the way he is regarded in Europe, that anyone should even think this might be a runner. But what is being questioned is not that there are competent people in Europe who could do the job. It is whether it is appropriate that it should be a European at all.

There are two reasons to question this. First, the weight of Europe in the world economy is falling rapidly. I have put the Goldman Sachs projections for the size of the different world economies for 2020 in the first graph. They probably underestimate the pace at which the Brics are overhauling the G7 but as you can see, even on these figures, China will be overwhelmingly the world's second largest economy. If the jobs were being shared out on the basis of economic importance there is no question that the next head of the IMF should come from China.

The second reason is that European national finances have been mismanaged in recent years. The problem is not just the indebtedness of the periphery, the nightmare in which Greece, Ireland and Portugal already find themselves engulfed. It is that all Europe has a debt problem – and not just Europe. As you can see from the bottom graph total debt levels (that is national debt, personal debt, company debt, etc, all added together) has shot up everywhere, with the UK in particular whizzing up this league. Why should countries that have succeeded in controlling their debt levels see the job of head of the IMF go to someone from a country that hasn't?

This leads to the "what should it be doing?" question. Should it just come along when some country has got itself into a mess, impose some austerity plans, and then give it some short-term loans? In the case of the recent European rescues it has really been a junior partner to the eurozone bailout fund, chipping in some of the cash but not really having much influence on the policies. Maybe had it had more influence on the Greek bailout that particular deal would not be unravelling right now. On the other hand it could be argued that IMF bailouts have not been universally admired: that it has had a "one size fits all" approach to financial restructuring that means countries are lumbered with policies that simply don't work.

On the other hand, the IMF does have huge experience. It does not have much financial fire-power relative to the sums that can be marshalled by the world's money and bond markets. The hope is and was that the seal of approval of a country's policies from the IMF would enable it to go back to the commercial markets for funds. The IMF itself was never intended to be a long-term lender. It cannot magic away a country's debt burden.

Stand back a moment. The developed world is in the early stages of an economic recovery after a particularly serious recession. It emerges with huge debts, debts that some countries at least will be unable to repay. But the notion of a sovereign default is not at all new. It may be new for a European country but there have been some 200 sovereign defaults since 1978, mostly in small emerging economies, and the IMF has been involved in the financial reconstruction that follows such default on many occasions.

So the question that follows is what role might the IMF play in helping the developed world get its finances in better order during this expansion? How do we use the years of expansion – the good years, or at least the not-too-bad ones – to get ourselves in decent shape before the next world recession comes along?

Now you may think that this has to be the task for national governments, that it is not the job of non-elected international civil servants to tell governments what to do. Of course at one level that must be right. But national governments are in charge only if they have the confidence of the financial markets. Lose that and then control is taken away from them, as has happened now to Greece, Ireland and Portugal. How much better it would have been had there been more external surveillance during the good years.

Maybe it is too much to ask but a well-run, authoritative, apolitical IMF could surely have some influence on governments during the next few years. It could nudge them towards more sustainable finances. It could audit national accounts, showing the consequences of political decisions. It could warn. It is of course doing this to some extent already but it has not achieved the authority that it should have done, or had a generation ago. Instead power has shifted to the ratings agencies, not a happy move for all the obvious reasons.

One thing I am pretty sure of, though: that a non-European head of the IMF would have a better chance of steering it in a new direction. Europe does not have the authority any more. We may just go back to business as usual but it would be an opportunity missed.

News
Emma Watson has become the latest target of the 4Chan nude hacking scandal
peopleThreats follows actress' speech on feminism and equality at the UN
News
Alan Bennett criticised the lack of fairness in British society encapsulated by the private school system
peopleBut he does like Stewart Lee
Sport
David Moyes and Louis van Gaal
football
Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
PROMOTED VIDEO
Life and Style
tech
Life and Style
Alan Turing, who was convicted of gross indecency in 1952, was granted a royal pardon last year
life
Life and Style
life
Arts and Entertainment
Tennis player Andy Murray's mum Judy has been paired with Anton du Beke for Strictly Come Dancing. 'I'm absolutely delighted,' she said.
tvJudy Murray 'struggling' to let Anton Du Beke take control on Strictly
Life and Style
Vote with your wallet: the app can help shoppers feel more informed about items on sale
lifeNew app reveals political leanings of food companies
Arts and Entertainment
The cover of Dark Side of the Moon
musicCan 'The Endless River' carry on the tradition? See for yourself
Sport
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
rugby
News
ebooksAn unforgettable anthology of contemporary reportage
Extras
indybest
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Arts and Entertainment
Salmond told a Scottish television chat show in 2001that he would also sit in front of a mirror and say things like,
tvCelebrity Trekkies from Alex Salmond to Barack Obama
News
i100
Life and Style
food + drink
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits