The multilateral monetary fund?

The decision of the International Monetary Fund (IMF) on 18 September to increase the voting powers of four of its member countries, including China, has kicked off a process which Gordon Brown, the UK finance minister, called "the biggest reforms to the governance of the IMF in its 60-year history".

The reforms also include giving the Washington-based financial institution a new role in trying to make sure the economic policies of the biggest and most important countries in the world are not so mutually incompatible that they pave the way to economic disaster.

But whether the reforms will live up to Brown’s billing remains to be seen. Final agreement on the highly contentious redistribution of voting power in the 144-member IMF is not scheduled until 2008. And the fund’s new so-called multilateral surveillance role is still unclear and contentious. So it may never prove to be the breakthrough in global economic policy co-operation hoped for by its architects, who include Mervyn King, the governor of the Bank of England.

In the meantime, the reform process poses major challenges for Europe in particular. The redistribution of power will certainly lead to a reduction in the 32% share of the votes which EU countries jointly hold in the IMF. If the United States and some major developing countries have their way the EU’s share of the vote will fall sharply. The Group of 24 developing countries is calling for the EU to be left with only 16% of the votes when the reforms are over. Such a drastic reduction is not on the cards.

But even a more moderate fall will increase the pressure on the EU, particularly on the countries of the eurozone, to co- ordinate their policies in the IMF more effectively. Divisions will only weaken them in the international negotiations ahead.

The rumbling dispute between Eurogroup chairman Jean-Claude Juncker and European Central Bank President Jean-Claude Trichet over who speaks for the eurozone in international negotiations shows that achieving closer co-ordination is not going to be easy. Moreover, smaller countries like the Netherlands and Belgium are in no mood either to surrender their seats in the IMF boardroom or see their representation at the IMF swallowed up into the single seat for the eurozone which the US has been pressing for. Germany too is not keen on the idea. As one relatively youthful EU official put it in Singapore, he doubted that he would live long enough to see a single eurozone seat at the IMF.

But the new two-year deadline for the IMF reform plan to be voted through does set the clock ticking. Europe must get its act together and not appear to be trying to delay the reform process now. To do so would make it look as if the EU was trying to block the increase in voting power at the IMF for major developing countries which is needed to reflect their bigger role in a globalising world economy. It could also put in danger the very survival of the IMF itself.

The fund, a financial institution which has helped to save the world (and numerous individual countries) from economic disaster on several occasions since its creation in the late 1940s is in serious danger of losing both credibility and legitimacy.

The EU, with its commitment to multilateral international diplomacy, is rightly deeply concerned about ensuring the IMF does survive. It certainly does not want to do anything which might further endanger it.

Europe will have to accept that its share of IMF votes is going to have to fall significantly. It will be tough but it is coming.

The bigger immediate challenge to Europe from the IMF reform process could well come from the tensions between the new role that the IMF is being asked to play in trying to prevent a global economic crisis and preparing the ground to manage the crisis that governments fear.

In its new multilateral surveillance role, the fund will initially focus on how to rebalance a world economy in which America is saving too little and running an $800 billion (€631bn) current account deficit as a result, while China and the big oil producers are piling up current account surpluses.

The process will involve calling together representatives from the five most systemically important economies in the world to discuss the compatibility of their economic policies. The IMF this month has started preliminary talks with the five: the US, Japan, China, Saudi Arabia and the eurozone. The objective, according to one top official involved in the talks, is first to try to get them to understand how the policies of one participant can spill over and have adverse effects on the others, and how, in turn, these policies, in this newly interdependent world, can backfire on the country which instigated them.

But, says another participant, a subtext of the talks is to bring together informally - in a multilateral rather than a bilateral setting - the individuals who would have to come together in a hurry should the much-feared crisis erupt. In this informal setting they can get to know each other better and understand their economic and political problems.

In years gone by, the Group of Five advanced industrial countries would usually perform this function, as they did in agreeing to devalue the dollar at the Plaza Hotel in New York in 1985.

Today even the enlarged G7 set of advanced economies does not include China, India, Saudi Arabia nor, at finance minister level, Russia. It, therefore, does not cover enough of the global economy to make it an effective forum for global crisis management. Indeed some top officials believe the G7 has been overtaken by events and is no longer a particularly useful forum for tackling such issues.

How this system of multilateral surveillance, guided by the IMF, might work in detail, and whether it will work at all, is now being explored. This evolving process is also putting pressure on the eurozone in particular to sort out its divisions, speak more clearly and unanimously on international economic policy and to decide who should do the speaking, Juncker, the chairman of the informal Eurogroup, or Trichet of the ECB.

Once again, if coherence is not achieved, then the voice of Europe will be muted and the influence which should be attached to the world’s biggest economy and second most important currency, will be squandered.

Top EU officials believe that multilateral surveilance will only work if big countries, especially the US, are ready to make real commitments to change their economic policies. Some doubt that this is going to happen without the looming threat of a global economic crisis to provide the incentive.

• Stewart Fleming is a freelance journalist based in Brussels.

The decision of the International Monetary Fund (IMF) on 18 September to increase the voting powers of four of its member countries, including China, has kicked off a process which Gordon Brown, the UK finance minister, called "the biggest reforms to the governance of the IMF in its 60-year history".

• Primary Source