Power struggle threatens to paralyze IMF

WASHINGTON, (Reuters) – A power struggle threatens  to throw the International Monetary Fund into disarray unless a  compromise is reached soon between the United States and Europe  over how to give more say to emerging powers.

The United States wants Europe to give some of the seats it  occupies on the 24-member board of the global lender to  emerging market countries to reflect their growing global  economic weight.

Europe has balked at the idea of yielding some of the nine  chairs it holds because it is divided over how to do it.

The sides face an Oct. 31 deadline when the mandate of the  existing board expires.

“The IMF will be in crisis unless a solution is found in  time,” a senior board official said.

Frustrated with Europe’s resistance to yield power,  Washington took an unprecedented step on Aug. 6 by blocking a  resolution which would have kept Europe’s board dominance.

The U.S. move also reflects broader economic tensions with  Europe over new global liquidity rules for banks and Europe’s  emphasis on fiscal austerity while Washington has stressed the  need to ensure economic recovery before belt-tightening.

There are concerns in Washington that the IMF might become  irrelevant and lose its legitimacy if it fails to change with  the times and become fully representative of both rich and  poorer nations.

The U.S. Treasury Department has said the election of the  IMF executive board was an opportunity for broader governance  changes in the Fund and has left the ball in Europe’s court.

A senior European Union official said representatives of  the 27 EU finance ministers will discuss the issue on Tuesday.

“Inevitably, the discussion will be about giving more room  for emerging economies, but the question is how much,” the  official, who has knowledge of the talks, told Reuters.

The EU official was unsure whether EU finance ministers  would discuss the impasse when they next meet on Sept. 6-7.

Some diplomats say the U.S. maneuver was a surprise because  the United States, the IMF’s largest and most influential  shareholder, has never flexed its muscle in such an overt way  at the Fund. Others acknowledged that Washington had long  raised its concerns at meetings.

The dominance of the United States and Europe on the board  reflects the post-World War Two economic order that is being  challenged by the rise of countries like China.

The board is one of the global lender’s top decision-making  bodies and has overseen the approval of billions of dollars in  emergency loans for countries hit by the global financial  crisis including Greece, Latvia, Romania and Ukraine.     Its approval is required for regular IMF reviews and the  disbursement of funds to the borrowers. Board officials warned that unless the sides reach a  compromise before Oct. 31, four seats held by India, Brazil,  Argentina and Rwanda would be scrapped because they have the  least quota shares.

“It will be disorderly and everyone will rush to make deals  with each other,” one board official emphasized.

If Europe gives ground, small EU nations, such as Belgium,  the Netherlands and Scandinavian states, could lose seats .

Ted Truman, a former assistant secretary at the U.S.  Treasury, said he doubted whether Europe and the United States  would allow the situation to deteriorate.

“I am sure it will be sorted out. No one wants to be  responsible for paralyzing the Fund,” said Truman, a senior  fellow at the Peterson Institute in Washington.

He said a compromise could include two options: a  commitment by Europeans to reduce over time their number of  seats, or to immediately give up two of them.

“The second option could be a down-payment,” he said,  noting that the size of the board also made it inefficient and  costly to run. Separate negotiations are underway among IMF member  countries on how to increase the voting power of rising  economic powers through membership quotas.

The Group of 20 major developed and developing economies  has called for an agreement by the next meeting in November on  how to give emerging economies more voting power in the IMF  through their quota shares. China is set to gain the most power  although other emerging economies are also likely to benefit.

“India’s consistent stand has been that global bodies like  the IMF need reform on an urgent basis to reflect the emerging  world order,” a senior Indian finance official said.