Unless the bookies have got it very wrong, it looks as though French finance minister Christine Lagarde will be installed as the head of the International Monetary Fund before Dominique Strauss-Kahn has even stood trial for attempted rape.
With Angela Merkel publicly backing her, all the signs were there this weekend that Europe is close to stitching up international finance’s top job, as it has done on every other occasion since the IMF was founded in 1945.
The Italian prime minister, Silvio Berlusconi, described her as a “great choice”, a view echoed by ministers from Austria and Sweden. The US is keeping its powder dry, but has refrained from criticising Lagarde. Under a selection process agreed late on Friday, the IMF’s executive committee will shortlist up to three candidates by 10 June and will hold a final vote on a successor by the 30th.
In addition to a “distinguished record in economic policymaking”, the fund said its new boss should have demonstrated “the managerial and diplomatic skills to lead a global institution”.
Lagarde was a 20-1 outsider last Wednesday, the day before Strauss-Kahn resigned. By Friday night, she was 6-4 on — eclipsing other European rivals such as Gordon Brown — after the German chancellor signalled her support, and Turkey’s Kemal Dervis, seen as a developing-country alternative, said he was not in the running.
Unless the developing world unites behind its own candidate, and quickly, the IMF looks likely to have its fifth French boss within weeks. Lagarde is a big enough hitter to ensure she will not be challenged by Washington, even though the appointment of yet another European will go down less well in Beijing, New Delhi and Brasilia.
Ken Rogoff, a former chief economist at the IMF, said: “It’s high time we had a non-European at the fund, just as it’s high time we had a non-American running the World Bank, but if the Americans go along with a European choice because they want to keep hold of the bank, I’m not sure there’s a lot that can be done about it.”
The gentleman’s agreement dictating that the Europeans pick the IMF boss while the Americans choose who runs the World Bank was meant to have been torn up. But the new “open and transparent” selection system still threw up Strauss-Kahn in 2007, and the Europeans put forward a high-profile candidate this time as well.
The ostensible reason was the need to have a managing director who was sensitive to the sovereign debt crisis battering the weaker countries of the eurozone. Strauss-Kahn was arrested en route to crisis talks about the plight of Greece, which is on the brink of being forced to accept a second EU/IMF bailout.
Charming her way round the international circuit
Those expecting Lagarde to give France’s European partners an easy ride may be disappointed — insiders say hers has been one of the harshest voices demanding austerity from Greece and Portugal in exchange for financial aid.
A straight-talking former corporate lawyer who spent years in the US, Lagarde has a reputation for charming her way round the international circuit.
She will need all that charm if she is to tackle the challenges facing the IMF. First, she will have to mend fences with developing countries exasperated at the old world powers’ stranglehold over the Bretton Woods institutions.
Simon Johnson, a former economist at the IMF, warns that if Lagarde does get the job, it will jeopardise the IMF’s ability to act as a neutral guardian of the global economy. “The emerging markets have been pushing very hard on this, very politely in my view,” he says. “Will they walk out of the room? No. Will they refuse to co-operate with the IMF for the forseeable future? They might.”
But that’s just the immediate challenge.
Strauss-Kahn, who arrived at the fund just as the financial tsunami was breaking in the autumn of 2007, had begun the process of making the IMF adapt to the complex, modern global economy.
He ditched some of the neoliberal orthodoxy that had been made redundant by the downturn, and sought to focus the IMF’s energies on tackling unemployment and inequality.
“He presided over an IMF that didn’t exactly throw the rulebook out of the window but at least tore a few pages from the really neoliberal chapter,” said Max Lawson, policy adviser at Oxfam.
But while Strauss-Kahn was a man of the left, Lagarde is Nicolas Sarkozy’s right-hand woman. She may push the IMF back to its traditional course in the many urgent challenges listed below.
Global imbalances
The imbalances that created the financial crisis — yawning trade deficits, out-of-kilter currencies and eye-watering debts — have never gone away. A “currency war” between China and the US is looming, with Beijing keeping the yuan cheap against the dollar; and the rich world’s commitment to globalisation is increasingly being questioned, as the Doha round of international trade talks runs into the sand.
The IMF is the only organisation with the global scope to tackle problems like these, and its new boss will have to hold the ring between competing interests and try to prevent frictions turning into all-out economic war.
Unemployment
Although most major economies have now emerged from the deepest recession since the second world war, recovery has been hamstrung by the bad debts built up in the boom years, and nervous companies remain reluctant to hire.
Ensuring that job creation — not misplaced fiscal masochism — is at the heart of the IMF’s prescriptions for the economies it tries to help will be an important goal for the new managing director.
Strauss-Kahn had recently begun putting inequality at the heart of the fund’s mission. It is not clear that Lagarde, if she is to be his successor, shares that view.
Regulation
The IMF failed to predict the catastrophic consequences of some of the financial innovations of the past decade — and indeed supported the creation of derivatives and other complex financial assets in the belief that they would reduce financial instability.
Its role is to put together a list of internationally agreed standards for central banks to follow in constraining their domestic financial institutions and preventing another meltdown.
France has demanded new curbs on hedge funds and attacked speculators for exacerbating the crisis; Sarkozy even suggested the French model could offer an alternative to rapacious Anglo-Saxon capitalism.
Europe’s debt crisis
Yields on Greek debt hit yet another high on Friday as investors continued to speculate that it will need a fresh bailout, on top of the €110-billion it has already been promised. Strauss-Kahn was said to have intervened to soften some of the toughest conditions imposed by creditor countries such as Germany and France; whoever takes over will have to get involved almost immediately.
Germany and the European Central Bank are already at loggerheads about how to resolve the crisis, and the IMF will have to act as a broker between warring eurozone countries.
Lagarde took a tough line on Friday, saying Greece was at risk of default, and must take even tougher action.
Governance and reform
Under Strauss-Kahn, the IMF took a series of baby-steps towards giving its developing-country members, such as China and India, more of a say in how it is run, and reflecting the new balance of power in the global economy.
But America still has a veto over policy decisions, and if the Americans and Europeans gang up, they can silence the rest of the world.
Campaigners say that without much more radical reform the IMF risks becoming irrelevant, sidelined by regional bodies such as the Chiang Mai initiative, under which Asian countries are discussing pooling currency reserves to avoid having to turn to the Bretton Woods institutions for help.
Development
In the 1990s, the initials IMF became synonymous with a brand of development that involved financial liberalisation, privatisation and fiscal austerity, with sometimes devastating consequences for the countries concerned.
More recently, the fund has softened its ‘Washington consensus’, providing more scope for governments to build social safety nets to protect the poor from the pain of economic adjustment.
The IMF, as well as the World Bank, has a responsibility to fight poverty. But France’s aid to Africa fell last year and it has failed to live up to the promises it made at the Gleneagles summit in 2005, so Lagarde’s record here is shaky. – guardian.co.uk