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EUROPE: IMF Tightening Control

BRUSSELS, Apr 21 2010 (IPS) - One topic regularly addressed by the public relations industry is how to turn a crisis into an opportunity. Dominique Straus–Kahn, managing director of the International Monetary Fund, might offer a case study on rising to this challenge.

Under his leadership, the Washington–based institution has skilfully exploited Europe’s economic woes in order to give it a greater role in this continent’s affairs than it has enjoyed for several decades. By proving he is on top of his brief, Straus-Kahn, a Socialist, is now widely tipped as the most likely victor of a 2012 presidential election in his native France.

Although this speculation could turn out too premature, it is nonetheless rich with irony: many pundits believe that Nicolas Sarkozy, the current French president, proposed Straus-Kahn for the IMF job in 2007 in order to remove his biggest rival from the domestic political scene.

This week an IMF team is scheduled to arrive in Athens for discussions on the precise details of the financial package it has agreed to provide for the ailing Greek economy (the team has had to revise its travel plans because most flights to and from European airports have been cancelled following the volcanic eruption in Iceland). The talks will follow a deal reached earlier this month, whereby countries belonging to the single currency euro-zone would release 30 billion euros (41 billion dollars) in the first year of a multi-annual plan for Greece and the IMF would give a further 10-15 billion euros in loans.

Will Hutton, a British economist who heads the Work Foundation think-tank, says that Greece’s economic perils had been a “happy coincidence” for Straus-Kahn. The Fund’s willingness to provide finance had been pivotal in convincing German Chancellor Angela Merkel that her government should contribute to the bail-out plan for Greece, despite the large-scale public opposition to it in Germany, according to Hutton.

“Straus-Kahn has broadly enabled a European solution,” Hutton told IPS. “He opened the way from Merkel to go from ‘nein’ to ‘ja’.”

The IMF’s support for Greece will almost certainly not be pain-free, judging by agreements it has struck elsewhere in Europe.

Such arrangements have generally been flanked by austerity measures that have meant increased hardship for huge numbers of ordinary people. In December last, Latvia approved a 40 percent reduction in public sector wages in order to secure a 7.5 billion euros package from the EU, World Bank and IMF. A few months earlier, the same three groupings suspended a bailout plan for Romania after the Bucharest government collapsed because it failed to win parliamentary backing for spending cuts. More recently, a new Romanian government has pledged to scrap 100,000 public sector jobs and raise the retirement age in order to placate the IMF.

Similarly, the IMF has demanded that Serbia keep its public sector wage and pension bill frozen this year to qualify for a 3 billion euros loan. And the Fund has withheld some of the funds earmarked for Ukraine to pressure the former Soviet country into reducing public expenditure.

Earlier this month, a senior economist in the Czech Republic alleged that the IMF had deliberately exaggerated the risks faced by Western banks doing business with Eastern Europe. Mojmir Hampl, deputy governor of the central bank in Prague, said that the IMF had ignored how the loans of international banks’ subsidiaries were frequently covered by local deposits.

“Before this crisis, (the IMF had) virtually no clients,” Hampl told Austrian newspaper Der Standard. “With this crisis and the new leadership under Dominique Straus-Kahn, the Fund found a new job and got more funds.”

Peter Chowla from the Bretton Woods Project, an anti-poverty group in London, said that Hampl’s comments should be treated with circumspection.

“The Czech central banker has a very interesting perspective but I would hesitate to think that they (the IMF) are that Machiavellian,” Chowla said. “Everybody I ever met from the Fund had good intentions. But the crisis has shown that their ideology is incorrect. You have to wonder why they stick to that failed ideology.”

Critics of the IMF acknowledge that there is much debate internally among the IMF’s staff about whether it should alter the rigid “free market” thinking that has pervaded the Fund, at least since the 1980s, when many of its most influential figures were acolytes of the right-wing economist Milton Friedman.

Olivier Blanchard, the IMF’s chief economist, issued a paper in February which queried if the institution had been right to advocate that all central banks should strive to keep inflation rates below 2 percent. And another document under discussion in the Fund argues that the IMF’s policies on capital controls should be re-evaluated. During the 1990s the IMF was blamed for fuelling a crisis in Asia after it put pressure on several countries in that continent to remove restrictions on inflows of capital.

But the Fund continues to face allegations of hypocrisy. While it has approved fiscal stimulus measures – including massive injections of public cash into the economy – designed to help the U.S. cope with recession, it has prescribed austerity measures for many countries with lower incomes. A study by the Centre for Economic and Policy Research in Washington examined the 41 countries receiving financial support from the IMF in 2009; in 31 of those cases the Fund had demanded a tightening of spending or monetary policies during a downturn in their economies.

“The Fund appears to be rethinking some of its ideologically driven mistakes,” Mark Weisbrot, the CEPR director, wrote recently in The Guardian. “But the problem is that it is still run by special interests. First, it is controlled by the finance ministries of the high-income countries, principally the U.S. Treasury department. The borrowing countries have practically no say in decision- making; the 2006 changes in voting shares lowered the rich countries’ majority from 52.7 percent to 52.3 percent and proposed changes will take it to 50.9 percent. No significant change there since 1944.”

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