Lagarde takes the helm, but should the IMF change its course?
by Daniel Mason
"I take this job with great pride, great humility as well, and some trepidation," Christine Lagarde said at a press conference on July 6, the day after taking over as managing director of the International Monetary Fund. She can be forgiven the trepidation given that her appointment comes at a time when the eurozone sovereign debt crisis shows no sign of abating. Indeed, it has worsened, with finance ministers unable to reach a deal on the details of a second €110bn rescue package for Greece, fears growing about contagion spreading to the single currency area's third largest economy Italy – surely too big to bail out – and the decisions by the rating agency Moody's to slash Irish and Portuguese bonds to junk status. And all this in Lagarde's own European backyard.
Fifty-five-year-old former synchronised swimmer Lagarde began her five-year term as IMF chief after being nominated by the institution's executive board ahead of her only rival, the Mexican banker Agustín Carstens. The selection procedure itself has been criticised – Peter Chowla of the Bretton Woods Project, which monitors the IMF, tells PublicServiceEurope.com that in his view "the process was far from fair, transparent, or merit based" and that European countries had "reneged on their promises to open up the process to more candidates". But Lagarde will know that the hard part is yet to come.
The IMF was founded in 1945 and Lagarde is its first female managing director. But she has so far shown few signs of being a revolutionary leader in other ways. In a statement released immediately after her appointment Lagarde said unequivocally: "The IMF has served its 187 member countries well during the global economic and financial crisis." They are not the words of a woman about to steer a radically different course to that set by her predecessor and compatriot Dominique Strauss-Kahn. Nor do they fill Chowla with confidence: "I am sure, given her background, that she is skilled at managing an institution – but that is not what the IMF needs right now. The IMF needs systematic reform of its governance and its policies. It does not need someone who makes sure the i's are dotted and the t's crossed."
It is a criticism echoed by other eminent commentators. In his New York Times blog the American economist Paul Krugman wrote: "She's serious, responsible, and judicious. But that, of course, is what worries me." Slashing deficits – as "very serious people want to do," he said – could turn in the slump into "decades of stagnation". And Philip Whyte, a senior research fellow at the London-based Centre for European Reform, told Bloomberg BusinessWeek: "She's a great facilitator and chair, but she's probably not in the absolute centre of influence." This view was is unanimous. Russia's deputy finance minister Sergei Storchak told the same publication, before Lagarde's appointment, that: "We're in the strange situation of having another European in line for this job, but a European whose personal and professional qualities make her almost impossible to compete with." And Lagarde has defined her own style as being "about opening up, reaching out and engaging as a team".
Indeed Lagarde's nationality, and more specifically her being a European, remains one of the most controversial aspects of the whole saga. She earned great respect in her home continent and beyond for her conduct as French finance minister, a post she held since 2007. She won the support of the G8 and was described by the United Kingdom's Chancellor of the Exchequer George Osborne as the "outstanding candidate". By the end of her leadership campaign she had won the support of the European Union, the United States, Brazil, China and Russia. She was a relatively popular politician in an unpopular government in France, polling a 51 per cent approval rating in May compared to President Nicolas Sarkozy's 37 per cent. But from the beginning there were dissenting voices calling for Europe's stranglehold on the IMF to be broken – the unwritten rule is that an American heads the World Bank and a European the IMF – and for the new managing director to come from an emerging economy.
Writing in the Daily Telegraph as the race to succeed Strauss-Kahn drew to a close, Liam Halligan, chief economist at Prosperity Capital Management, summed up the feelings of many: "This crucial institution needs to reflect the extent to which the world has changed since it was launched from the ashes of the Second World War. He continued: "The IMF specialises in fiscal bail-outs. Putting fairness and morality aside, it should be heavily influenced, and regularly run, by well-qualified nationals of the countries with the most fiscal strength. However much we deny it, and whatever the extent to which our ratings agencies are cowed by politicians, that seriously undermines the case for a western candidate." The west, according to Halligan, is demonstrating "how not to run a capitalist society". Meanwhile Chowla tells me he would have had "no problem" with the appointment of a European candidate had the process been open and transparent. But he adds that having an IMF chief whose own country or region is in crisis will always be an issue and Lagarde's close relationship with the eurozone – she helped design the EU's emergency bail-out facility last year, for example – brings into question her independence.
To counter those criticisms Lagarde toured the BRIC nations, Brazil, Russia, India and China, to drum up support. She has said she will continue to implement reforms, already set in train, to modernise the institution's governance and the update the voting rights of member countries to better reflect the ever-changing balance of global economic power. In an interview with the BBC on her second day in the job Lagarde said: "Before I was elected, I went around the world to actually explain what I stood for, and I made a point of visiting in particular the emerging market economies, because there were comments and concerns about the fact that it was just yet another European. And I made it very clear that I was coming as a candidate for the whole membership." She has put her words into practice by appointing China's Zhu Min, a special adviser to the IMF for the last year, to a newly created deputy managing director post.
Being a European is nothing unusual at the fund. But Lagarde is only the second IMF managing director who is not an economist by training – the other being the Swede Ivar Rooth, who led the fund in the 1950s. She says of her qualifications for the job that "the truth of the pudding is in the eating," and she is certainly not short of relevant experience. Before becoming France's finance minister she held a number of more junior ministerial positions, and between 1981 and 2005 she worked her way to the top of the law firm Baker & McKenzie. But she joins the IMF at a key juncture in its history. After years of dishing out its medicine to developing countries, the fund is now intervening in European countries including Latvia, Romania, Greece, Ireland and Portugal. Under Strauss- Kahn the IMF tripled its budget and pledged one-third of the money required for the European bailouts.
One of the fund's old prescriptions, currency devaluation, is not available in the single currency area. And yesterday in a report the IMF blamed Germany for not acting as an "economic locomotive in Europe". According to Chowla, the fund "has not learned the lessons of the Asian crisis or the Argentine crisis or the Russian crisis: that austerity policies are often misplaced and damaging when they are imposed in this way". He points to the recession in Greece – worse than many expected after a year under an IMF programme, with unemployment sky high – as evidence. A second rescue package would pile on more debt to bail-out private banks and Greece's debt must be restructured, he says, adding "Something has to give. The question is whether the change will happen in an orderly fashion."
Chowla continues: "To be fair the IMF is not alone, not even in the lead, in pushing these policies. The EU is in the lead, which is all the more reason why at the head of the IMF we need someone independent of the member states, and we do not have that now." He calls for some intellectual leadership from the fund's management: "An IMF acting in a truly independent manner would have said that these debts were unsustainable and that it would not finance a programme unless there was a solution. And that solution needs to reflect the need to deal with the social consequences and inequalities that have resulted from the crisis." Lagarde tackled the question of her independence in her press conference on July, 6, insisting that "you can rely on me that the IMF in its judgment will remain independent".
But in Newsweek magazine, the founding members of the Centre on Capitalism and Society, Amar Bhide and Edmund Phelps, the latter a Nobel prize-winning economist, went further even than Chowla, claiming that Lagarde had joined an organisation which "has outlived its purpose". They write: "The IMF's business model sabotages properly functioning capitalism, victimising ordinary people while benefiting the elites. Do we need international agencies to enable irresponsible – verging on immoral – borrowing and lending? Instead of dreaming up too-clever-by-half schemes to stumble through crises after they happen, why not just stop imprudent banks from accommodating foreign borrowing by feckless governments? After all, it's French and German taxpayers who are on the hook—not just the Greeks and the Irish." Like Chowla they criticised the fund for continuing with the same austerity policies on which it has always relied.
At her press conference Lagarde highlighted two concerns: the sovereign debt crisis in advanced economies, and over-heating in emerging markets. She said her focus would be on dealing with those problems rather than indulging in excessive institutional soul-searching. "We need to focus on what we can provide. We need to be available to our membership and not constantly look at our belly button and wonder how we can best do this or do that," she said. She outlined a framework of three Cs – connections between economies, comprehensives in approach and, perhaps most importantly, credibility in the fund's work.
There is one area where Lagarde's appointment marks a clean break with the past. Strauss-Kahn, of course, resigned to face charges of sexual assault against a New York hotel maid, accusation he denies. Now Lagarde's terms of employment include new, tough ethical rules. Her contract says she must avoid "even the appearance of impropriety" and "have an exclusive duty of loyalty to the fund". She will also attend a mandatory ethics training programme. And although a French court recently left open the possibility of legal proceedings against Lagarde for alleged abuses of her position in her handling of a tycoon's court case when she was French finance minister – she has consistently said her conscience is clear – she will be confident of repairing the IMF's battered reputation. Assuming she sticks to the rules, she will be rewarded with an annual salary of $467,940 as well as an allowance of $84,000 plus expense.
The most controversial part of Lagarde's appointment was just how uncontroversial it was. She was the clear favourite from the beginning despite all of the question marks about the way the IMF has handled the economic crisis and about Europe's continued dominance of the fund at the expense of emerging economies. The pressure is now on the institution as a whole to meet the new managing director's credibility test.