June 2015

7 June 2015

The June 2015 Newsletter focuses on international governance in relation to Greece, FIFA and the G7 highlighting the importance of adequate governance arrangements.

IMF, Greece and international governance

Greece is on the brink of default. This is largely its own making. Greece, the IMF and EU/ECB do not seem able to agree on conditions sufficient to resume Greece’s IMF-supported adjustment programme. Less clear is, who actually decides what conditions need to be met and how. The governance guiding the Greek economic adjustment programme has significantly weakened Greece and the IMF.

The increasing perception that Germany will de facto decide on Greece’s fate is troublesome. It undermines deeply the multilateral framework and international governance on which basis the IMF operates. It weakens Greece’s position vis-à-vis the IMF. It risks alienating further the other IMF member countries that may feel increasingly that they are merely there to rubberstamp decisions taken in Berlin.

The interest of the IMF is not necessarily aligned with the EU/ECB. The IMF aims to restore stability in Greece to allow Greece to meet its external obligations. The EU/ECB would like Greece to stay in the Euro area. Both do not necessarily require the same adjustment measures. This conflict of interest may complicate considerably prospects of an agreement between Greece, the IMF and EU/ECB. On 28 May, an IMF spokesperson in a press conference stressed “that we would need agreement with the Greek authorities and the European partners on a comprehensive set of policies.” The latter highlights the fundamental dilemma of the IMF arrangement with Greece. The IMF does not control the Greek arrangement.

The relationship between the IMF and the EU/ECB fundamentally upsets the governance arrangement of the IMF. Significant efforts to adjust IMF governance were directed precisely at curbing the perceived undue influence of Europe at the institution. Delays in implementing governance reforms to shift influence away from Europe have caused considerable apprehension in particular among large emerging markets. The IMF/EU/ECB combo makes a mockery of such efforts (Chart).

EU voting power at the IMF

The IMF is a multilateral institution with 188 member countries. The IMF Executive Board approves by simple majority the use of IMF resources on the basis of policies on stand-by or similar arrangements. The IMF reviews the arrangement at regular interval to assess whether the country remains on track with its obligations under the arrangement and if so is eligible to draw resources (make currency purchases) to help meet its financial obligations. The fundamental principle underlying IMF arrangements is that the policies are adopted by the country in distress “without resorting to measures destructive of national or international prosperity” (IMF Articles of Agreement), that is, there are policies that may seem optimal for the country but may be suboptimal for the international economy.

The Greek arrangement is legally governed by Greece’s commitments to the IMF as expressed in its letter of intent to the IMF Management Director. However, in the Greek case needed conditionality guiding the arrangement to qualify for IMF assistance is also negotiated with the EU and ECB. Reviews to assess whether conditionality has been met are also conducted by the EU and ECB. This has de facto implied that decisions to extend IMF resources have been taken by the EU or for that matter Germany. Germany has a voting share of 5.8 percent at the IMF Board and the EU (27) of 31.0 percent (Chart). The influence of Germany and the EU on the Greek arrangement is highly disproportional to their voting power at the IMF.

The high probability of default of Greece to the IMF marks the failure of the Greek arrangement whatever the reason. Greece owes the IMF EUR21 billion and a default would be unprecedented in scale. Because the IMF is like a credit union—it borrows from its creditor member countries to lend to its debtor member countries—its resources correspond broadly to member countries’ subscriptions (quotas) plus additional borrowing arrangements. Any impairment reduces the IMF’s financial resources and affect the entire membership of the IMF.

The fundamental risk sharing properties of any IMF arrangement implies that the IMF Executive Board needs to exercise full control of any arrangement to preserve accountability and enforceability of measures taken under the arrangement. The IMF therefore needs toquit the EU/ECB to ensure it can act in the interest of the multilateral system it represents. One of the most important lessons for the IMF from the Greek programme should be that a multilateral institution should not institutionalise special interests of a subset of its membership. The IMF/EU/ECB model is incompatible with the multilateral framework (also see The IMF must quit the Troika to survive).

FIFA and international governance

The corruption and other allegations against the Fédération Internationale de Football Association (FIFA) serve as a reminder of the importance of effective international governance arrangements. While the indictments brought against individual FIFA officials with charges of racketeering, wire fraud and money laundering conspiracies, seem to point to severe failures of internal controls and compliance, FIFA’s governance structure may lend itself unduly to misconduct.

FIFA has 209 members. Members are national football associations and the “four British Associations” and associations in a region “which has not yet gained independence” (Article 10, FIFA Statutes). The football associations have formed six Confederations. National football associations naturally differ in size, e.g. the German Football Association (DFB) has about 165,000 teams; the Barbados Football Association (BFA) has 174 teams.

FIFA is a big financial institution. Revenues in 2011-14 represented US$5,718 million. 72 percent of revenues are generated from TV rights and marketing of which US$2,428 million and US$1,580 million alone were attributable to the sale of television rights and marketing rights for the Brazil World Cup. The majority of revenues is channelled back into football through development programmes, international football tournaments and the organisation of the next FIFA World Cup. The Financial Assistance Programme (FAP) is one of FIFA’s main programmes to help develop football activities. FIFA spent US$1,052 million in 2011-14 in football development. The accumulated expenses of the Brazil World Cup amounted to US$2,224 million. For 2015-18, US$3,800 million are scheduled in expenditures of which the 2018 World Cup in Russia alone represents US$2,153 million (FIFA Financial Report 2014). FIFA maintains an investment portfolio of US$1,762 million.

FIFA’s governance structure rests on the Congress, Executive Committee and the President. The Congress consists of the members and is FIFA’s main legislative body and meets annually to review members, Executive Committee members and vote on the designation of the host country of the FIFA World Cup. Each members has one vote (Article 23, FIFA Statutes). The Executive Committee, consisting of 25 members, maintains 8 vice-presidents elected by their respective Confederations. The Executive Committee among other supervises the Audit and Compliance Committee. The President represents FIFA legally and proposes the guidelines for FIFA’s overall strategy.

The decisions by the Congress are taken mostly by absolute majority. The FIFA World Cup venue selection is based on the bids designated by the Executive Committee and require an absolute majority of the members. The Executive Committee reviews all venue bids but can only submit 3 bids for a ballot by the Congress.

FIFA’s one member one vote is an outlier among international financial institutions and international institutions that control large financial outlays. Most international financial institutions align voting power with financial or economic clout. The IMF and World Bank maintain a weighted vote based broadly on the economic size of a country. Other international financial institutions are based on similar weighted voting but may allow for flatter voting distributions, e.g. the Latin American Development Bank (CAF). The BRICS Development Bank adopted a rare equal distribution of voting power based on initial subscriptions. The Council of the European Union is based on weighted voting where the weight is determined by population. The ECB since 2015 adopted a system of weighted votes based on economic size and financial sector size and monthly rotation of voting rights.

FIFA’s distribution of voting power appears unfair and highly susceptible to manipulation. The one member one vote implies that Germany has the same voting power as Barbados despite important differences in both number of teams and revenue generation. The former allocates a disproportional large share of voice to football associations with a small number of teams undermining fair representation. The latter undermines accountability amid the possible asymmetry between revenue generation and control of expenditure (Chart). The high dispersion of votes means that absolute majorities require considerable voting clustering allowing small members to wield considerable influence despite low representation and low revenue generation. This must not but may represent an important source of manipulation amid weak implied accountability vis-à-vis football associations’ constituencies, that is, while the reward of manipulation is high given FIFA’s vast sums at its disposal, penalties in terms of lost revenue are low. Weighted voting would establish a much fairer balance between revenue raising, institutional control and representation.

FIFA revenues and voting power

G7 and international governance

The G7 summit held in Germany on 7-8 June feels like an arrangement from the past. While the G7 has undoubtedly still powerful countries in its midst, it also suffers from its weakling members. More importantly, the G7 excludes many countries that matter considerably today. Even more importantly, there is little appetite for policy coordination generally. This should not mean that there is no need for the G7 to meet, cosy talks among political leaders can be useful, but it raises the question of whether such meeting matters for the rest of the world or crucially what is the international dimension of the G7 summit?

The G7 was not meant to survive. The G20 was intended to supplant the G7. Weak G20 actions have kept the G7 alive. The G20 appears too large and heterogeneous a grouping to be effective notwithstanding herein should lie its strength. In an increasingly multi-polar world the G20 seems the more representative grouping. The G20 though like the G7 suffers from lack of legitimacy.

The G7 has traditionally focused on the international economy. The adoption of other topics including the environment and security are relevant in principle but do not seem to lend themselves to concrete policy actions. The G7 was perceived as most effective during the 1980s with the adoption of the Plaza and Louvre accords on exchange rate coordination.

The G7 does matter, potentially. This rests in large part on the fact that there is relatively little international political leadership. Few groupings like the G7 still have the power of initiative and occasionally of leadership. It is the lack of alternative international political leadership that makes the G7 still a highly relevant grouping.

The lack of legitimacy remains the G7’s biggest drawback. The grouping is informal and ad hoc and acts outside the multilateral framework. The IMF continues to constitute the main mechanism for consultations and collaboration on international economic affairs but suffers from increasing lack of legitimacy itself amid failed progress on needed governance reforms. The G7 was formed in large part due to the fact that the growing membership of the IMF no longer offered sufficient an intimate meeting ground. In the past, the G7 acted mostly through the IMF, the IMF was considered the quasi-secretariat of the G7, preserving important links to the multilateral framework. The lack of legitimacy would matter if the G7 was to impose important measures on the rest of the world without due consultation or coordination. This does not seem to be the case.

The decline in economic weight has reduced though by far not eliminated the G7’s ability to steer the international economy. The G7 in the mid-1980s represented about two thirds of world GDP. Today, the G7 represents less than half of world GDP and is projected to decline further (Chart).

G7 share in world GDP

The most important hint towards G7 irrelevance is a generalised lack of and desire for international policy coordination. Even within the EU, significant divergence of economic performance between EU member countries is a sign of scant economic policy coordination. The significant volatility of key exchange rates is another sign that economic policy coordination is at its low.

The international dimension of the G7 summit will rest largely on the G7’s ability to connect effectively with the rest of the world. Maybe the G7 could just serve to recall the advantages of economic policy dialogue and coordination. That in itself would be a great achievement.