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.

Start your day with The Independent, sign up for daily news emails
News
people
News
A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
News
politicsIs David Cameron trying to prove he's down with the kids?
News
Cumberbatch was speaking on US television when he made the comment (Getty)
people
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea