Christine Lagarde is in poll position. Having put her name forward last week, the silver-haired French finance minister may well become the new managing director of the International Monetary Fund (IMF).
Lagarde has, with a depressing inevitability, secured the backing of most European countries. The UK was among the first to endorse her. There are rumours the mighty US could soon throw its weight behind Lagarde – making her bid a fait accompli.
Europe seems determined to retain its prerogative of appointing the boss of the world’s most important financial watchdog.
Throughout the IMF’s 65-year history, all 11 bosses have been from Western Europe. In return for allowing this stitch-up, America has traditionally provided the IMF deputy, while securing the top spot at the World Bank.
Amid such blatant favouritism, there have been promises to make such selection processes more “transparent” and “merit-based”. But Europe is saying “not yet”. IMF voting weights remain so skewed that the US and European Union together – with only 10pc of the global population – can still out-gun the rest of the world combined.
The question of who runs the IMF usually interests financial and economic nerds. Yet huge speculation surrounds the identity of the next Fund boss. One reason is the salacious nature of the previous managing director’s fall. Dominique Strauss-Kahn, while protesting his innocence, remains embroiled in a lurid New York sex scandal. No wonder the current contest has leapt from the business press on to the world’s front pages.
There are bigger reasons, though, why the name of the next IMF chief matters. For one thing, 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.
In addition, global markets could now be teetering on the brink of another “Lehman moment”, similar to that which struck in the autumn of 2008. If ever there was a time for the right person to be in charge of monitoring the global economy, that time is now.
I have previously argued it would be “a historic mistake” if the new IMF boss was a European. I robustly maintain that view. After all, the emerging markets now account for four-fifths of the world’s population and almost half of global GDP. Since 2008, they have also commanded a higher share of world trade than the West.
After years of economic out-performance, these countries now have around three-quarters of the world’s currency reserves and, in stark contrast to debt-mired Western countries, generally boast healthy sovereign balance sheets.
The IMF specializes 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.
When the IMF began, the West perhaps had much to teach the rest of the world about running a capitalist society – and the fiscal muscle and moral authority to impose our will. Those days have gone. Several of the big Western nations are now bankrupt in all but name, their sovereign debt markets reliant on printed money. Commercially, we are losing ground and our moral authority is depleted. We are showing the world how NOT to run a capitalist society. Yet our leaders sail on, oblivious to such realities, claiming the top jobs almost as their birthright.
This week I want to stress that the next IMF boss, while not hailing from the West, also shouldn’t be a politician. Many argue that the case for a politician, especially a European politician like Lagarde, is currently very strong. For the first time ever, much of the IMF’s lending is in Europe – given the continent’s disgraceful sovereign debt crisis. So, we are told, the new Fund boss must understand and pay due deference to the nuances of European politics, in order to defuse the EU’s fiscal time-bomb – a bomb that could easily explode, sending shockwaves across the world.
Such reasoning is the basis of claims that Strauss-Kahn, impeccably connected across Europe and a political animal manqué, was a “superb” IMF boss. Yet such reasoning is absurd. The IMF works properly not when it is loved by the countries it is lending to, but when it is banging political heads together to get myopic, economically illiterate politicians to face up to fiscal realities. Unless the IMF is seen as tough – even unreasonably tough – then it isn’t doing its job.
An IMF that colludes with the political classes isn’t enacting reform. It is simply helping the politicians bury their mistakes and kick any problems into the long grass where they will fester. The IMF should be respected – even feared. It is for the politicians to stand up and face the political music – explaining to their electorates why harsh actions are needed and why nations can’t go on living beyond their means.
Perhaps the most dangerous type of politician to run the Fund is a politician still hankering after high office. Strauss-Kahn, of course, was using the post and the influence it bestowed over trillions of dollars of bail-out cash, as a platform for a French presidential bid. As such, he turned the IMF into a soft-credit society for the eurozone’s periphery nations, holding the single-currency together for the benefit of his Franco-German friends.
Strauss-Kahn’s continued insistence on “just one more bail-out”, rather than forcing Greece, Portugal and the rest to face up to genuine debt-restructuring, also made sure that the losses stayed with plebian taxpayers, rather than being shifted on to Europe’s banks. He could have called in the favour, no doubt, when the need came to finance his campaign for the ultimate prize.
It was not to be for Strauss-Kahn, of course. But what is to stop Lagarde following the same route? She now has that most precious of political factors in her favour – momentum, or “the big mo”. And with only one other candidate in the ring for the IMF job – Mexican Central Banker Agustin Carstens – no wonder she is still odds-on favourite.
Lagarde’s spin doctors are now working overtime. The Indian press is reporting her IMF campaign tour starts on Monday in Delhi – “given her long association with India”. The Brazilian press, meanwhile, is gushing that her first stop will actually be Rio. A future IMF boss shouldn’t be indulging in such “image making” and giving “my life as a mother” interviews. All this reveals how much see craves public acclaim – the kiss of death for someone in line to run a hard-headed institution.
If she lands the IMF job, which seems likely, Lagarde will be well placed, if she can avoid her own judicial pitfalls, to run for the Élysée in 2017. This will be on her mind every single day she spends at the helm of the Fund – which is precisely why she’s unsuitable. Running the IMF, now more than ever, requires economic expertise, massive intellectual authority and a willingness to be deeply unpopular – particularly, if you are a European, on your home turf.
The emerging economies need to stop moaning, put their differences aside, and set their combined authority behind a world-class economic policy-maker to run the IMF. Such nations should be doing everything in their power to wrestle control of this pivotal institution from a Western political elite that is not only intellectually inadequate, but which seems determined to compound the world’s economic problems. The deadline for nominations is June 10.
Liam Halligan is chief economist at Prosperity Capital Management
This article first appeared in The Sunday Telegraph: