© Manjit Jari

Today marks the 60^th anniversary of Germany becoming a member of the IMF. Having already joined international organisations like the OEEC and the GATT, this – together with the membership in the World Bank - was a further important step in reintegrating post-war Germany into the world community. Since then, the Fund and Germany have established a very close and trust-based relationship. For the Bundesbank, this is highlighted by the fact that our president is the governor of the Fund for Germany and by its active role in the Fund’s policy dialogue. Germany’s contributions to the Fund are one of the strongest among the IMF membership. In concert with other members, this partnership has over the years tackled many challenges of the times, from the dissolution of the Bretton Woods system to the problems of the current global financial crisis.

The global financial crisis called for unconventional policy measures. Yet one has to step back from time to time and reconsider policies in broader terms, including those of the IMF, bearing in mind its monetary character. Are our actions likely to provide a credible, durable and stable framework that will instil confidence, or do they focus too strongly on the short term without properly taking longer-term effects into account?

Against this backdrop, let me point to at least two sets of interrelated issues regarding developments at the IMF. The first concerns changes in the Fund’s lending policies. Like many other institutions, the IMF has responded to exceptional circumstances with exceptional measures. In the process it has stretched its monetary mandate, expanding the scale and scope of its operations. Direct budget financing has increased markedly. Also, the amounts countries can borrow under a programme have risen substantially. Against this background, a strict and more focussed conditionality is ever more important to contain risks to the Fund’s resources.

In this context it is important to recall that the Fund’s financing mechanism is not compatible with an assumption of undue risks. The financial integrity of the Fund and the effectiveness and viability of its policy tools depend crucially on the Fund’s lending and financial policies. In my view it is important that the Fund pays attention to the necessary strength of its access policy, conditionality and programme design as its primary risk mitigation measures. Recent signs of increasing sensitivity towards the need for stronger lending policies and commensurate programme design are therefore highly welcome.

Second, an important function of an IMF programme used to be the provision of catalytic finance. By providing limited amounts of financial resources to support an adjustment programme, the Fund signalled markets that the country in question was back on the road to recovery. This then triggered further private investments. Today, the significant amounts extended, coupled with the Fund’s preferred creditor status, which limits financial risks to the Fund, can produce an incentive structure of reduced private sector financing. This, in turn, is likely to create an ever higher need for public sector support with corresponding financial risks.

Of course, the IMF will always have to adapt to a changing world, and it has repeatedly proven in the past that it can do so. Moreover, the IMF always needs adequate resources to fulfil its systemic role in the international monetary system. In providing such financial resources, the Bundesbank has always been and will continue to be a reliable partner for the Fund. Using IMF resources in support of what may be politically desirable should not come at the expense of the economically unavoidable. Money can buy time, but it can never be a substitute for sound macroeconomic policies and structural reforms. Any time bought needs to be put to good use.

The IMF recently stepped up its surveillance of financial sector issues and macro-financial linkages. In view of the above, I strongly support and encourage this move. I also welcome the IMF’s paying closer attention to the increased interconnectedness of the world economy, while emphasising the importance of domestic stability. Generally, too little attention was paid to these issues before the global crisis. It is worth mentioning in this context that the Fund was swift to identify potential lessons from the crisis, which included an extensive assessment of its own surveillance. As a result, the Fund’s surveillance focus has been adjusted and its analysis extended. These are welcome steps in the right direction. And I am confident about further achievements at the annual meeting in Tokyo in October.

Looking ahead, the Fund with its distinct competencies can be of great help in filling some of the remaining gaps in understanding and analysis. Furthermore, I welcome the agreed IMF governance reforms that will enhance the voice and representation of emerging market economies to better reflect the relative positions of IMF members in the world economy. It remains true, however, that for the Fund’s successful role in the international monetary system and its legitimacy, representation and financial responsibilities must at all times be aligned in an appropriate manner.