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Is Europe clinging on to the IMF? - Outside View by Asad Dossani

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Is Europe clinging on to the IMF?
May 23, 2011

Last week, IMF head Dominique Strauss-Kahn was charged with sexually assaulting a hotel maid during his stay in New York. He was detained before he could leave the country, and soon afterwards resigned as head of the International Monetary Fund (IMF), as it was clear he could not perform his duties while in custody. Of course, this has now led to speculation as to who the next head of the IMF will be.

Since the inception of the IMF, the head of the organization has always been a European. The US and Europe have had a long standing implicit agreement that the head of the IMF will be a European, and the head of the World Bank will be an American. While this arrangement has not caused significant protest in the past, today there are calls for emerging economies to have a greater role in these organizations.

Indeed, many names of potential heads from emerging economies have been put forward. These include Montek Ahluwalia from India, and other candidates from countries like Brazil, South Africa, Singapore, or Russia. And their case is fairly strong. Given that emerging economies now account for most of the world's GDP growth, and their size is significant relative to developed economies, it makes perfect sense that these economies should have a greater say in in the IMF.

In practice, there appears to be little appetite of appointing an IMF head that is not a European. European politicians have been vocal in their view that another European candidate would be ideal for the job. The primary reason cited is that given the problems present in the Eurozone with the debt crisis, and the current situation of the euro, it makes sense that the head of the IMF should be someone who is close to these issues and understands them well.

The real reason for wanting a European head could be quite different. In a way, it is symbolic of the desire for Europe to maintain its global influence in the face of its waning economic power. The mandate of the IMF is to provide policy advice, financial assistance, and to help solve macroeconomic problems on a global scale.

There is nothing specifically European about the IMF's mandate. All countries around the world face some economic problems, not just the peripheral Eurozone countries. So even if there is a current debt crisis in Europe; that is not a good enough justification for a European to remain at the helm of the IMF. In fact, a change can be a good thing in this case. While it currently appears unlikely that the new head of the IMF will be from an emerging economy, it is certainly something that could occur in the not too distant future. In the meantime, we should expect Europe and developed economies generally to do whatever they can to cling on to influential positions in these international organizations.

Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!

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