Cause and Effect in European Politics and Law

BRICS Countries Will Establish Their Own Bank

Zhaneta Kuyumdzhieva, Adelina Marini, April 5, 2012

Two events from end-March spark a very deep deliberation about the capabilities of the eurozone rescue funds to ensure the so much needed global security and gradual exit from the debt crisis. The first event is the summit of the BRICS countries (Brazil, Russia, India, China and South Africa) in New Delhi on March 29, and the second is the meeting of the Eurogroup in Copenhagen a day later (March 30). As you know, the G20 partners of the European Union (a large part of whom are precisely the BRICS countries, representing 43% of world population) expected the eurozone leaders to increase the lending capacity of their rescue funds if they wanted help from outside. The expectations were for over 1 trillion euros or more precisely of 1.5 to 2 trillion euros, which would be enough to sustain hits like a need to rescue Spain or Italy.

The EU for its part relies on external assistance from the G20 countries in order to secure precisely this larger lending capacity. An agreement was reached the countries from the influential group to help the eurozone through increasing the resources of the IMF. USA, Japan and Britain, however, quite clearly opposed paying larger contributions to the fund unless the eurozone increased sufficiently (whatever that means) the lending capacity of its two rescue funds (the EFSF and the European Stability Mechanism). The BRICS countries, for their part, were sending positive signals that they were ready to increase their participation in the IMF without explicitly tabling any particular conditions because they are well known.

It is necessary the agreements from 2010 to be implemented urgently for a reform of the representation in the World Bank and the International Monetary Fund, is said in the joint declaration of the BRICS after their meeting in New Delhi on March 29. In the document, disturbance of these countries is clearly expressed from the slow pace of the agreed changes. BRICS think that a dynamic process of reform is necessary to ensure the legitimacy and effectiveness of the fund. In point 9 of the declaration it is explicitly pointed out that the current conditions for an increase of the lending capacity of the IMF would be successful only when there is confidence that all members of the institution are genuinely determined to apply the agreed reform entirely. "We will work with the international community to ensure that sufficient resources can be mobilised to the IMF in a timely manner as the Fund continues its transition to improve governance and legitimacy", the declaration reads.

This means that the five countries will provide money only if the reform of the IMF is implemented in such a way to better reflect the economic weight of the participant countries. And the Eurogroup agreed to 800 billion euros of lending capacity, large part of which, however, is the result of good accounting rather than real money.

The issue of reforming the IMF is a topic from previous BRICS summits. The efforts of Brazil, Russia, India, China and South Africa delivered in December 2010, when the board of directors of the fund agreed to redistribute the quotas and the representation of the IMF members in the board of executive directors. The previous managing director of the fund, Dominique Strauss-Kahn, described these changes as the most significant reform in the history of the international organisation, which is a proof of the shift of influence to the benefit of the dynamically developing economies.

The administrative reform envisages all the 24 members of the board of executive directors to be elected and the European representation to vacate 2 out of the 8 board seats it holds. This change would respond to the effect of the new quota distribution, highlighting the BRICS countries as leading countries in the fund. The reforms require amendments to the statute and the expectations are the reforms to be a fact by the annual meeting of the managing directors of the fund in the autumn of 2012.

Another very important element in the BRICS declaration is the election of a president of the World Bank, because in June the mandate of Robert Zoellick expires. So far there is an unofficial agreement between Europe and the US the World Bank to be led by an American and the IMF by a European. The change of leadership of the fund happened quickly and did not leave much time for discussions because the previous chief of the fund, the French Dominique Strauss-Kahn, was forced to resign because of a sex scandal. He was quickly replaced by the French minister of finance Christine Lagarde. For the World Bank, however, there are intensive debates who should succeed Zoellick. Alas, the emerging economies and the poorer states were unable to unite around a common nomination.

President Barack Obama made a surprising move literally days before the deadline for offering of nominations ended, by proposing the American-Korean Jim Yong Kim to take the post. Kim is a medical doctor and has a PhD in anthropology from Harvard. His nomination is very compromising because he is a migrant from South Korea and has a successful career in securing programmes and aid for the health care systems of the poor countries around the world. Among the other nominations is the Nigerian Ngozi Okonjo-Iweala, currently a minister of finance of Nigeria and a former managing director of the World Bank; Jose Antonio Ocampo from Columbia, who was Undersecretary General of the UN and a finance minister of Columbia. Another candidate for the post was Jeffrey Sachs, who however withheld in support of Kim.

But according to BRICS, the leaders of the IMF and the World Bank should be elected in an open merits-based process. Besides, the new leadership of the World Bank has to transform the bank into a multilateral institution, which would actually reflect the visions of all its members, including the managing structure in such a way to reflect the current economic and political reality. Again a hint for the shift of economic influence. Moreover, BRICS expect the bank to turn into an institution that defends equal partnership with all countries as a way to tackle the problems of development and to overcome the dichotomy of donor-recipient.

In this context, quite interesting is the issue of creating a Development Bank, which will finance projects, related to infrastructure and the sustainable development of the countries in the group, as well as of the developing countries. BRICS discussed this idea and think that the bank should work to support the existing efforts of multilateral and regional financial institutions for global growth and development. In the attached to the declaration action plan, the discussion of this possibility will continue among the finance minsters of the participant countries, who have to finish their discussions by the next annual summit of BRICS.

In the meantime, while the process of global repositioning is unfolding, BRICS expect the advanced economies to undertake responsible macroeconomic and fiscal policies, avoiding the creation of excessive global liquidity, to undertake structural reforms, aimed at increasing growth and jobs creation. They express concerns from the risks of too large and dangerous for stability trans border capital flows to the emerging economies and again call for an increase of the international financial regulatory supervision.

By the way, of the risks of excessive liquidity globally spoke also Juergen Stark, who was a member of the executive board of the European Central Bank and a chief economist of the bank, who surprisingly resigned in the end of last year because of disagreement with the programme for buying of bonds of the countries with troubles. In an interview with the BBC this week, he spoke for the first time openly about his visions about the debt crisis in the eurozone and the global situation, saying that no matter how big the size of the rescue fund was, it would not solve the main issue - the weak competitiveness of the affected countries.

This means that the eurozone will need money from the outside but it is obvious that BRICS will consolidate further their influence and will systematise it in common messages, which they expect to be correctly understood by the current leading powers in the world - USA, Europe, Japan, Britain. The question is whether Europe is ready to sacrifice a significant part of its global influence in exchange for money for rescue the eurozone.