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“Europeans to loose clout to China” in IMF restructuring, says Strauss-Kahn

Wednesday, September 23rd 2009 - 12:07 UTC
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IMF Managing Director Strauss Kahn: China is a big player IMF Managing Director Strauss Kahn: China is a big player

China will get the biggest increase in voting power at the IMF (*) when the global lender completes a long-awaited restructuring in 2011, the head of the IMF said Tuesday. In an interview with Reuters, IMF Managing Director Dominique Strauss-Kahn said European nations, which have resisted a dilution of their global economic clout in the IMF, increasingly recognized it was time for change.

“The Europeans understand it is time to move” said Strauss-Kahn, a former French finance minister. “So, some European countries will be smaller, others will be larger.”

“The only big change will be China, and I think that is totally fair”.

The United States has proposed a 5 percent shift in voting power from developed countries to some “dynamic” emerging economies. China could overtake France and Britain in IMF voting power. The main emerging economies have countered with a proposed 7 percent shift.

Strauss-Kahn said China, the world's most powerful emerging nation, was ready to play a bigger role in the global financial system. The developed world now realizes that letting China gain more influence in the IMF provides an incentive for Beijing to play a more constructive role in the international financial system.

“When they are recognized as a big player, they will play as a big player,” Strauss-Kahn added.

The shift in attitudes comes as the US pushes for world leaders to work toward a more balanced global economy that involves China and other big exporters shifting their economies more toward domestic demand, while large debtor nations, particularly the US, look to export more.

Washington is pressing leaders from the Group of 20 developed and emerging nations to agree on a “framework” for achieving better global balance at a meeting on Thursday and Friday in Pittsburgh.

Asian countries, wary of the IMF handling of the Asian financial crisis in the 1990s, have amassed trillions of dollars in savings as insurance against a future crisis and avoid having to turn to the IMF for help again.

Strauss-Kahn said a more representative IMF would give countries confidence the fund would be there for them in times of crisis, taking away an inducement to save.

“The question of global imbalances and governance are totally linked,” he said.

Some economists have blamed those high savings for contributing to the financial crisis. With the money sloshing around the global economy, interest rates remained unusually low, helping to build housing bubbles and pushing investors toward increasingly risky assets to generate better returns.

Under the US rebalancing proposal, G20 nations would assess each others' policies. The IMF would be called upon to gauge the impact of those policies and report back twice a year with suggested adjustments.

Strauss-Kahn said the G20 grouping of nations offered a unique forum to tackle imbalances, but warned political will for tough policy choices may fade once economies heal.

“This kind of coordination is needed to solve the global imbalances. What is at stake is whether this coordination lasts after the crisis or not, or whether everybody will go back to their own domestic political problems.”

He said it was not too soon to tackle imbalances as long as the global recovery is properly nurtured and governments don't withdraw support for their economies too soon.

The imbalances were “a problem before the crisis, during the crisis and will be a problem after the crisis. So it is not too soon to deal with it,” Strauss-Kahn said.

“Moreover, part of what has been done during the crisis may change the rules of the game both for countries with big surpluses and countries having big deficits.”

He said part of the solution for ensuring more balanced global growth would be for China to rely less on exports to drive its economy and more on domestic demand, adding that China needed to let its currency rise in value.

“We still believe the Renminbi is undervalued,” Strauss-Kahn said.

He noted in the United States the crisis had already prompted some rebalancing, with a big drop in household wealth encouraging more saving and less consumption.

(*) European countries, which make up 25% of the world economy, hold 40% of the votes. The US, which makes up another 25% of the world economy, only holds 17% of the voting rights. But under IMF rules, all major decisions require a majority of 85%, making the US the only individual country that can block any decision.

The US and China have proposed that European countries give up 5% to 7% of their quota in order to provide more votes to the emerging economies. But smaller European countries, such as the Netherlands and Sweden, are reluctant to give up their seats on the 24-member IMF board.

Europe also argues it has made the biggest contribution to renewing IMF funds (lending over 150 billion US dollars of the 500 billion asked for).

Categories: Economy, International.

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