Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 100-119)


27 APRIL 2006

  Q120  Ms Keeble: Can I come back just a little on that because there are some questions we have got here on the brief, which I think to an extent have been dealt with, about transparency and about information, and obviously having the media present, whilst some people do not like it, is actually an important part of ensuring that. Part of the success of your speech was that it did get into the general media and not just the finance media and that was really important. In your model, is there not a risk that you have a very nice economic debate, very intellectually satisfying, you issue the communique«, then you say to the Americans, "You've got to deal with the deficit," which means budget cuts, which no politician likes, and you say to the Chinese, "You've got to deal with your surpluses," which means consumer spending, which is politically explosive in China. How do you bring those two worlds together to get obviously what you are wanting?

  Mr King: You have to have both. I think it is a question of timing. Some of the meetings that might take place as part of multilateral consultations should be able to take place without the participants feeling under the pressure of immediately going out and facing the cameras. At the end of the consultation, which might take several meetings and maybe many months, the IMF should be under pressure, and the Managing Director has said he would do this, to make public the IMF's views on the outcomes. I think people will know that the IMF will have to make a public statement at some point. Nevertheless, they should still be able to have meetings where they can be frank and open with each other. I think that was the original purpose of the G7. The G7 has drifted into a situation in which the purpose of the G7 meeting is to issue a communique«. This is the wrong way round. A communique« might report on a meeting but you do not want a meeting driven by the question "What can we think of to put in the communique« this time?" There have to be opportunities for having meetings where you are not committed to a communique« at each and every meeting but where the Fund, at the end of this process, has to make a clear public statement of its analysis and its views on where the consultation has got to. It is rather like our MPC meetings. We do not allow the cameras into our MPC meetings because we want to encourage frank interchange across the table, but at the end of the process we do publish detailed minutes, 13 days later, which set out the arguments and the terms of the debate. If we allowed the cameras into the meetings you would not see as open and frank a discussion at the MPC meeting as you do get now. You can get transparency but it has to be designed carefully.

  Q121  Chairman: There are cameras here, Governor, and I hope you are still being frank?

  Mr King: I always try to be frank, Chairman.

  Q122  Mr Gauke: Governor, first of all, may I say what a splendid tie you are wearing.

  Mr King: I hasten to add, this is the tie of the All-Party Parliamentary Group on Cricket.

  Q123  Mr Gauke: Indeed, and your address to that Group earlier this week was very much appreciated, by all Parties, and I think Colin would confirm that. If I may ask how the Bank reports on its dealings with the IMF; the Treasury produces an Annual Report, how does the Bank of England address this matter?

  Mr King: In terms of communicating, we do it through that Report. That Report summarises the contribution of the Bank. We work closely with the Treasury on all the meetings leading up to the spring and annual meetings of the Fund and our work is reported in there too.

  Q124  Mr Gauke: Do you think, as a general rule, that the Bank is as transparent as it might be, with regard to international organisations such as the IMF?

  Mr King: We are here today, in front of the cameras, as the Chairman has reminded us. I think we could not be more transparent than that.

  Q125  Mr Gauke: Fair enough. One issue which a committee of the European Parliament has raised is greater co-ordination at a European level in the IMF, in the sense that the US has got a percentage which gives it a veto; if you combined all the various EU countries together it would be enough also to have a veto. Can I ask for your views on that issue?

  Mr King: I think it is important to distinguish between the European Union, on the one hand, and the euro area, on the other. In the context of any multilateral consultation on the world economy you would expect the European Central Bank to be one of the players, yet the ECB does not have a seat at the table of the IMFC. Why? It does not correspond to a country. This is one of the challenges to the euro area in the future. It needs to develop, on the political side, the way in which it can have common and shared representation. That has not evolved anywhere as quickly on the political side as it has on the Central Bank side.

  Q126  Mr Gauke: Is that in respect of countries in the eurozone alone?

  Mr King: Yes; just countries in the eurozone. They have their currency and the multilateral consultations will be about issues relating to the euro and the monetary and fiscal policies in the eurozone and the consequences for the currency. There is quite a good argument for suggesting that the euro area has to think quite hard and deeply in the years to come about how it is represented at the IMF. The same does not apply to the European Union, where there are countries with national sovereignty over their monetary and fiscal policy, and obviously in our case a different currency altogether. There may be a question about exchanging views to see whether there is or is not common ground on various issues to put forward a common European position. It could not be the case that the representatives, for example, of the euro area could possibly speak for the United Kingdom on monetary or fiscal policy; we have our own currency. I think it is important to distinguish between those two aspects of it.

  Q127  Mr Gauke: Presumably, you think the ECB should be there?

  Mr King: Obviously they should be there, but I understand the frustrations of many non-Europeans, which are that in a process of what is described as European integration and the creation of a single currency with a single Central Bank, the result is that more Europeans end up at the table rather than fewer. This does not seem intuitively obvious and indeed it has been a source of quite significant friction and frustration at all international meetings, whether it is the IMF or even the G7, and at some point the euro area will have to face up to this.

  Q128  Mr Gauke: As far as you are concerned, there is a substantial distinction between those countries that are in the eurozone and those countries that are outside, as far as organisations such as the IMF are concerned?

  Mr King: Yes, because the IMF, as some of the earlier questions indicated, is, first and foremost, about currencies and exchange rates, so what distinguishes members round the table is that they have their own currency and exchange rate. This is the challenge which faces both the euro area and indeed the Fund itself, which is that there is a group of countries which have one currency. That does not make representation easy. The arguments about pooling representation have some force, but they have force because those countries share a common currency.

  Q129  Mr Gauke: They do not have a force when applied to us?

  Mr King: No. They would have, if we were to join the single currency, but with our own currency, no.

  Q130  Mr Gauke: Given that, is there room for much scope for co-ordination with other EU countries?

  Mr King: Yes, there is plenty of scope and indeed we ourselves sit on the International Committee of the European Central Bank, because we are members of the system of European Central Banks and I am a member of the General Council. It is useful to have discussions about the questions and issues in order to help all of us evolve our view. Sometimes that view is very similar, in which case we can present a harmonised view. In other cases it is not, in which case we present our own view.

  Q131  Mr Gauke: It is essential, whilst we remain outside the eurozone, which looks likely for the foreseeable future, that we must have a separate voice at the IMF?

  Mr King: Indeed, and I do not think anyone would suggest otherwise.

  Q132  Mr Todd: Can we turn to the issue of governance and accountability. You have given your opinions on the possibility of dividing the function of lending and the representation in that part of the IMF's role from, for example, setting out the accountabilities of the leadership of the IMF, where perhaps there might be a rather broader representation gulf. I think you have made the very fair point that lenders have a perfect right to set their own conditions and have a substantial say in those conditions. Do you want to add to that approach?

  Mr King: No. I think that, in general terms, it is important that the Fund has a very clear sense of its own mission. It has, in the past, been less clear. I think the Managing Director has evolved now a very clear view. I think the membership too must have responsibility for ensuring that it understands the clear mission of the Fund and over recent years there has been a tendency for groups like the G7, or even the IMFC at times, to say, "Well, here's a new problem we've thought of in the past six months, let's give another responsibility to the IMF." I think that does not make life easy for the Fund. It is very important that we maintain a very clear view of the core mission of the Fund and then to hold the Managing Director and his staff accountable for achieving that.

  Q133  Mr Todd: Let me come back on the accountability issue. You disagree very strongly with the World Development Movement who told you that you were wrong in advocating increased independence for the Fund and more accountability within the Fund?

  Mr King: I am not sure if they understood entirely what I was suggesting. To hold senior management properly accountable is something which I find it hard to believe they would disagree with. It is important to have proper accountability mechanisms and they must be accountable to the members as a whole. That is why I think that we need to make the Board, which represents all 184 member countries, an effective Board which is capable of holding the management accountable.

  Q134  Mr Todd: Rebalancing the representation in decision-making within the Fund is based on decisions about quotas and there is a review with us currently. How do you feel that should be addressed?

  Mr King: I think everyone accepts, and that came out of the IMFC communique«, that there does need to be a change. The reason is not so much effect the day-to-day workings of the Fund.

  Q135  Mr Todd: I think it conceded that there needed to be change; it did not say actually quite how people could do it?

  Mr King: No, but it made it clear that the Managing Director had to bring forward concrete proposals at Singapore for that, and I would be amazed if we did not get some agreement at Singapore about at least a limited set of ad hoc increases in quotas. The main objective here, I think, is to deal with the perfectly reasonable questioning by many countries of the legitimacy of the Fund, when the quotas represent a rather outdated view of the world economy. Some change is important to ensure the legitimacy of the Fund. I would not expect this to make a dramatic difference, it is cultural, it is a question of legitimacy. It is not going to have much impact on the way the Fund works, because it is an organisation where people make their contribution, how seriously it is taken, how it affects other people, is not a function of their quota, it is a function of their clout and weight in the world economy. The fact that China has a small quota now relative to its calculated quota does not mean to say that people take China less seriously now than they would 12 months from now if the quota were increased.

  Q136  Mr Todd: Would you extend that argument to discussion of the USA's quota and to their role effectively as having a veto in the organisation, in the sense that obviously no-one could ignore the USA's position in the world economy, regardless of precisely what voting weight can be given within the IMF?

  Mr King: I think if the US were strongly to oppose something it would make it very hard for the Fund to be effective. We have seen that in the G7. If the US does not really go along with a proposal in the G7, the G7 tends not to go off in a different direction, and the G7 as a whole is the major block in the Fund. Countries do have enormous influence reflecting their status and position in the world economy, and the precise quota does not really influence that. That is not an argument against changing quotas at all, because it is of more than just symbolic importance. If there really is to be an institution where people have trust in the neutrality of the management and the fact that it will be objective in its analysis, it must be willing to change the quotas in line with the changing importance of countries in the world economy. It is important in terms of establishing the overall trust and confidence of members in the Fund, but if we had made quite significant changes in quotas I doubt that you would see that reflected in changes in decisions or attitudes, and so on.

  Q137  Mr Todd: Do you think the discussion of the US's unique position within the IMF is really an artificial discussion and, in a sense, that everyone accepts they do have a unique position, however we choose to parcel out voting rights and powers within the IMF?

  Mr King: I think that is largely the case and I think it would be much better to focus on, for example, something that is very important for governance, the debates on how the Managing Director is chosen. To my mind, this does not have anything to do with quotas or votes, it is to do with the determination of the membership to say, "Well, look, this time we really must put in place a process to ensure we have the choice of the best candidate."

  Q138  Mr Todd: You have led me on to a question I was going to ask, which is about the process for appointing the Managing Director. Do you feel that procedure should be altered? Obviously I think it has already been accepted there should be a transparent procedure, but there are lots of procedures which can be transparent without necessarily producing the best outcome. What reforms do you think should be put in place to ensure that we secure a person with widespread acceptability, who may not be, for example, European?

  Mr King: Indeed, and I think that what is most important is to put in place a process which is acceptable to the membership overall. It is not at all clear what the present process is. The most important thing is to write down what that process is before there is a vacancy. If you try to develop a process for making an appointment once there is a vacancy then you are in deep trouble, because the question of who the candidate will be is bound up inextricably with the process. It is most important to put this in place now while there is no vacancy. I think this view is becoming more widely accepted. I think it is particularly incumbent on the European countries to make a reality of this and to say, if a vacancy were to occur, "No, we're not going to fall back on simply having a private European meeting and nominating a candidate. We will abide by the process and we'll put forward some candidates perhaps, but we have to go for the best person."

  Q139  Mr Todd: Do you think the IMFC works effectively?

  Mr King: Up until now I would have said it is one of those meetings, on a Saturday afternoon in a windowless room in Washington, when you would be sitting there thinking "Is anybody else outside the room taking any notice of this?"

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