Has the IMF changed the rules?
The FT’s Alan Beattie is right to point out to the importance of recent IMF staff paper on the potential for temporary capital controls in times of economic crisis:
The International Monetary Fund has cemented a substantial ideological shift by accepting the use of direct controls to calm volatile cross-border capital flows, as employed by emerging market countries in recent years.
Although the fund continued to warn that such controls should be “targeted, transparent, and generally temporary”, the policy, announced in a staff paper released on Monday, is a sharp change from the fund’s enthusiasm for liberalising capital accounts during the 1990s.
This is an interesting enough step back from the IMF’s liberalisation fundamentalism in itself,, but I wonder if it might be the prelude to something bigger, namely a recognition that free trade itself may not be all it’s cracked up to be when it’s between countries with massive imbalances, including within Europe.
Oddly, I hope this might be the case is because of what the paper IMF gets slightly wrong, when it says:
[T]he Treaty on the functioning of the European Union (EU) has established free capital movements as a bind obligation among EU members and between EU members and third countries (p.8).
This is the truth, but not the whole truth. Article 63 of the [Lisbon] Treaty of the Functioning of the EU (TFEU) does indeed prohibit restrictions on capital flow within member states, but the much-maligned Brussels bureaucracy have sensibly inserted a get-out at Article 64 (para. 3) in respect of capital flows beyond the EU.
Notwithstanding paragraph 2, only the Council, acting in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament, adopt measures which constitute a step backwards in Union law as regards the liberalisation of the movement of capital to or from third countries.
It’s reasonable to assume that, as and when the new IMF view on the advisability of temporary capital controls in times of crisis gains traction amongst Euro-policymakers, this existing get–out clause may become increasingly attractive (e.g. to stop flows into non-EU safe havens; indeed, the comments below the line of the FT article are full of (somewhat sarcastic) commentary on how the IMF’s move might be deliberately geared to the next phase of the Eurozone crisis (and what was portrayed part of the problem for developing countries is now magically transformed into part of the solution for Europe).
And if Euro-policymakers become ready (even keen) - now that the IMF has broken the taboo – to consider this “step back” from the ideals set out in the Lisbon Treaty and its predecessors, then perhaps it’s reasonable to assume that they’ll also start to take note of the other great reversible in the Treaty, namely free movement of goods and services.
As I’ve set out previously, Article 30 of the TFEU sets out the prohibition of customs duties within the single market but Article 32 (d) provides the get-out clause:
In carrying out the tasks entrusted to it under this Chapter the Commission shall be guided by…..the need to avoid serious disturbances in the economies of Member States and to ensure rational development of production and an expansion of consumption within the Union.
Given the choice between the drastic-sounding idea of capital controls as short-term crisis management and the longer term rebalancing effects of allowing export subsidies/import duties, it may well be that the latter is the route chosen*.
Exactly a year ago, blog-economists Chris Dillow and Duncan Weldon pointed out the potential for such ‘artificial devaluation’ within the Eurozone, but both felt it unworkable within the confines of the single market. Back then, it probably was, but maybe, just maybe, the IMF are changing the rules of the game, with a little help from the Brussels bureaucracy.
The IMF as saviours of Greece; who’d have thought it?
* It is easy to forget, for example, that in the UK capital controls were only abolished in 1979, and what a massive impact that had on investment levels in the crucial deindustrialisation years in the 1980s. By 1982, for example, British capital outflow was running at three times the rates of inward investment (p.360). Nevertheless, it is more difficult to conceive of a sudden return to capital controls (anyone remember the Foreign Travel Allowance of £50 per person stoutly defended by Eric Heffer in 1969?) than it is to accept the idea of import duties as a means of ecomomic restructuring over time.