European impact in the multilateral system

69 - European policy on the reform of Bretton Woods institutions

Grade: C+
Unity 3/5
Resources 3/5
Outcome 4/10
Total 10/20
Scorecard 2012: B- (12/20)

The US publicly embarrassed the EU by forcing it to accept a diminution of its influence at the IMF, although the final deal protects EU interests. World Bank reform was smoother.

EU member states are formally committed to governance reform in both the International Monetary Fund (IMF) and the World Bank. This inevitably means reducing Europe’s overall voting weight in both institutions, but in 2010 there was no common EU strategy on how to manage this – and what concessions to ask from the US and the emerging economies in return for a deal.

World Bank reform proved relatively easy. In April, the Europeans agreed to shift of three percent of voting rights from developed to developing countries. China and other non-Western governments pledged additional capital to the bank in return.  IMF reform was much more controversial, with intra-EU debates failing to produce a consensus on reform options. In August, the US demonstrated its impatience with the EU’s lack of progress on the issue by threatening to veto the routine election of the IMF’s board (see component 39).

While the Americans argued that the EU should shift towards a consolidated presence on the IMF board, European governments united around a less radical set of reforms. These included surrendering some board seats and six percent of voting rights to the rising Asian economies. They also privately lobbied for the US to reduce its own voting weight on the IMF board, which gives Washington veto power over all decisions. The US refused and a compromise was eventually agreed at a hectic G20 finance ministers’ meeting in October.

The final deal is arguably still favourable to the EU – the Europeans’ combined voting weight at the IMF will continue to be greater than that of the BRIC countries. The emerging economies also pledged new capital for the IMF. Nonetheless, the way in which the US publicly forced the EU to compromise on the issue (and gave no concession in return over its own de facto veto right and other reform) was a severe embarrassment and sets a bleak precedent for future rounds of reform in the international financial institutions.