Inferno awaits Lagarde

PUBLISHED : Tuesday, 05 July, 2011, 12:00am
UPDATED : Tuesday, 05 July, 2011, 12:00am


Christine Lagarde has hardly allowed time for her seat as France's finance minister to cool before she is leaping into the really hot job, an inferno, as the first woman to head the International Monetary Fund. She takes over today, six days after the vote.

She has already made several comments, one sensible, another nonsense, and a third that smacks of political naivety, all illustrating a multitude of problems facing her. The sensible one was: 'The IMF does not belong to anybody. It belongs to the 187 members of the fund, and the management of the fund does not belong to any particular nation or region.' She pledged: 'I will make it my overriding goal that our institution continues to serve its entire membership with the same focus and the same spirit.'

Too bad Lagarde did not appreciate this in campaigning for the job, and giving a loud and clear 'Vive l'Europe' as one of her slogans. Her overwhelming victory by consensus after Europe was joined by the US, China, Japan and India only masks widely felt resentment that the Europeans, and particularly the French, have stolen the top IMF job again.

A question is, what promises did she make on her seduction drive? Right after she left Beijing, reports said she had promised, if elected, to give China a 'greater say' - whatever that means - in running the IMF. After being chosen, she said: 'We can't effectively represent the world economic balance of power if certain economies are under-represented.'

At one level this is polite diplomatic nonsense; at another it is quite dangerous. Is it the job of the IMF to 'represent the world economic balance of power'? If so, then only the US, China, Japan and Europe count.

Largarde's reported promise to China was interpreted to mean either increased representation and/or one of the top plum jobs at the IMF.

The first refers to the shareholding. China is on the brink of becoming the third-largest shareholder, marginally behind Japan with slightly more than 6 per cent each of the votes. It is disputable whether China should be a bigger shareholder than Japan, but the political reality is that it has taken years of haggling and it will be some time before China actually takes the third slot with the ratification of new quota increases.

The US, China, Japan, India, Britain and Italy will all have fewer votes in the new IMF than their share of global gross domestic product, according to the fund's formula using a blend of market and purchasing power parity exchange rates. The 27 European Union countries will still have more votes (29.4 per cent) than their share of global GDP (27.8 per cent), but would Lagarde lead the fight to cut Europe to size?

Her easier way would be to appoint a Chinese to be deputy managing director, but this would risk politicising the management further. A better way would be to depoliticise all the top jobs, which would mean refusing to let the US appoint the senior deputy managing director, refusing to let Japan appoint a deputy managing director and refusing to have a deputy managing director alternate between Africa and Latin America.

All jobs should be open to competition and not handed as a gift to any government. Governments have their chance through their executive directors to throw their political weight around without the need for constant spies in management. But does Lagarde have the guts to stand up against the US, Japan and China?

If so, she would be on stronger ground to insist that her successor be chosen through open competition, an answer to chattering heads on the BBC, CNN, Financial Times and The Wall Street Journal who say it should be Asia's or China's or India's 'turn'. It should be no one's 'turn', always the best person for the job.

Lagarde also appealed on French television to 'the Greek political opposition to support the party that is in power in a spirit of national unity', proof of French President Nicolas Sarkozy's reported view that she is a political lightweight.

Stock markets rose on relief that Greece had passed its austerity plan, but many economists doubt it can live up to its severe terms. How do you solve a problem like recalcitrant Greece, feasting on borrowed money for too long, a mere 3 per cent of the EU economy but with the potential to bring down the whole edifice?

Lagarde and her supporters claimed her European origins would be her main asset in dealing with the debt crisis. That may also be mistaken if the IMF does its simple sums and calculates how much lending is going to sickly Eurozone countries without solutions in sight. It has lent Greece, Ireland and Portugal about US$111 billion, or twice the amount that the 19 other non-euro-zone debtors are getting. Lagarde, representing 187 members, will have to raise awkward questions.

Among the tricky questions are: the debt crisis and repercussions for global growth; the role of the US dollar and global reserve currency; how to deal with potential tsunamis of capital movements; how the IMF and World Bank fit with the G20 in steering the world economy.

The most intriguing question may be how Lagarde copes with the male suits who dominate finance. As French finance chief she wore power suits with skirts, and had a pointed mantra that testosterone-challenged men or men showing off their hairy chests - she used both expressions - were responsible for the financial crisis. Lehman Sisters would not have set the world in flames.

It is a challenging start, but even feminists might be nervous as seeing it as a substitute for a policy of how to deal with the IMF's burning issues.


The number of employees and economists Christine Lagarde will oversee at the IMF

- She is the 11th European to lead the fund