Europe or Asia: Who Should Take Over the IMF?

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Amid the hubbub over Dominique Strauss-Kahn’s sex scandal, emerging market countries have made it clear they want his successor to come from one of their countries. This would end the outdated “gentleman’s agreement” between the U.S. and Europe that guaranteed a European would take the slot of managing director, and an American would head up things at the World Bank. Europeans, of course, think the post should stay with a European who can carry on sorting out the mess of debt-riddled Europe. Beyond the obvious solipsism there, the euro crowd argue the stability of the global financial system depends on it. So who’s right, and how will things actually shake up?

It’s much more likely an emerging market candidate will win the job now than back when Strauss-Kahn was selected in 2007. One of DSK’s major achievements at the IMF has been revamping the institution’s voting structure to give downtrodden countries and up-and-coming economic powers greater voice.  Those changes put China in the number three voting position and boosted the voting powers of the other BRICs, Brazil, India, and Russia, to the top 10. But even with those shifts, the arithmetic still favors the good old “gentlemen’s agreement.” China still doesn’t have enough voting shares to constitute a veto, and the G7 developed countries added together still have enough voting power to get their way.

What has changed is the U.S. position on the matter. Before the DSK fiasco, the United States had actually wanted an emerging market candidate to take the helm at the IMF post-DSK.  U.S. officials thought it might make up for all their recent blunders with emerging market countries (stoking inflation abroad, dallying with the dollar’s value, etc) and win back emerging market favor, which has slowly crept toward China. The problem is, if the U.S. tries to back an emerging market candidate now, at a time when Europeans are insistent that the eurozone crisis take precedent, the Europeans may ask the U.S. to give up its #2 spot at the IMF. And that would be a tough pill for the U.S. to swallow.

Then there’s the question of China. China’s poured a lot of cash into the IMF in recent years to boost its influence. But a winning Chinese candidate isn’t likely, since, of the top five positions at the IMF, two are already filled by Asians. Adding a Chinese managing director to that list would be hard for most countries to stomach. The real push for China will be to get another lower-ranking official promoted to the top five set and to make sure a pro-U.S. Indian contender (such as longtime Indian economic official Montek Singh Ahluwalia) doesn’t win the managing director role.

French finance minister Christine Lagarde is surfacing as a top contender, but if she wins, it can’t be because she’s French. “For Europe to say a European should lead is the problem. They’re not saying Christine Lagarde is the best person for the job; they’re saying she is the best European,” says former IMF-er Eswar Prasad. “What’s most important is that this be viewed as a fair merit-based process.”

Those are the logistics. So what’s right for the global economy? In a globalized system, the world is facing more instability, volatility, and cross-border financial flows than ever before. And those are only going to increase as emerging markets grow. Giving voice and priority to the needs of those markets will be as important to Europe’s financial stability as China’s. Whoever takes the top post, European or not, will have to keep that in mind.