The exhausting European crisis dominating financial markets worldwide highlights profound concerns that our financial system is rudderless, adrift and could crash. These anxieties may be overdone, but the need for an independent, powerful central authority to provide guidance and discipline is clear. There is only one possible candidate, the International Monetary Fund, which in recent years appears to have lost its way and its influence.
There was a time when the IMF was seen as powerful and willing to be unpopular if that was what it took to promote policies that led to economic reform and sustainable growth. It had the courage to confront major governments when that was necessary, and the skill to articulate actions to secure the stability of the global financial system – and be listened to. It is now urgent that the fund serves again as the anchor of the global financial system.
Most recently the IMF erred in subordinating its independence to the eurozone’s politicians. Had it taken the lead early last year, after it was clear that Greece was in a fiscal mess, and structured a reform programme, extended credit and brought private creditors to the table, the costs to all would have been far less painful than they are now. Instead, the fund was willing to march in line with indecisive Brussels officials and their political masters. It allowed itself to become more of a minor player, rather than an anchor, as contagion spread to other European countries.