If the International Monetary Fund did not exist, it would surely have to be invented. Its medicine is often harsh and frequently criticised, but as lender of last resort to countries that temporarily find themselves shut out of financial markets, its purpose is noble and necessary. In no other field has international co-operation worked as successfully in addressing global problems as it has through the offices of the IMF. The world would undoubtedly be a more chaotic place without it. Just lately, however, its credibility has been endangered as rarely before. Something has gone very badly wrong, and the international consensus on which the organisation is based is fracturing.


The squalid, self-administered nemesis of Dominique Strauss-Kahn, the IMF’s former managing director, plainly hasn’t helped, but in the end that will be no more than a passing blemish that will likely quite soon be forgotten. No – today’s problems run much deeper than sexual scandal. They are to do with the organisation’s slavish support for the euro, a misjudgment that seems destined to test international faith in the IMF to breaking point.


The IMF’s purpose is to instill the “right” economic policies in countries so that they can become competitive, and when things go awry, to provide the stop-gap finance and policies that get them back on their feet. In addressing the European debt crisis, it has veered dangerously from this mission. Support seems directed more at sustaining the single currency than helping individual nations out of their difficulties. This is leading to the now routine prescription of inappropriate policy – repeated rounds of fiscal austerity with none of the compensating support of monetary stimulus and devaluation that countries such as Britain, with their own sovereign currencies, have been able to apply. The IMF has thereby become complicit in making a bad situation much worse.


In a recent analysis of developments in Greece, the IMF virtually admitted as much, describing with eloquence how fiscal austerity had become self-defeating by undermining all hope of economic growth. Yet in defiance of its own evidence, the organisation concluded that the programme remained on track.