The greatest threat to global financial stability today is the eurozone debt crisis. Europe can and should contain this threat by itself, for its own sake and that of world economy. But this is no reason to turn down the International Monetary Fund’s request for increased resources. Financial stability is a global public good, and the Fund’s members should equip it to safeguard that good without abdicating their own responsibilities.
The IMF’s firepower lags behind the enormous growth of cross-border financial flows, even after the Group of 20 leading economies agreed to triple its resources three years ago. To do its job, the Fund needs to be able to address a sovereign debt crisis in a large economy. The $387bn it has at its immediate disposal is not enough: a lending capacity in the order of $1tn is necessary.
This may be a tall order; it is depressing if that is so. The IMF is funded by its member states, which should not find it difficult to oblige. Many emerging countries are flush with surpluses, and in any case new resources can take the form of arrangements for the IMF to borrow from members when it needs to rather than upfront contributions. A more attractive funding option still is for the IMF membership to accept issuance of new Special Drawing Rights, the IMF’s pseudo-currency. This would have the side benefit of additional global monetary easing.
