Why Christine Lagarde Should Never Be Head Of The IMF – by Liam Halligan

Lagardzy 300x180 Why Christine Lagarde Should Never Be Head Of The IMF – by Liam Halligan

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:


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3 Responses to Why Christine Lagarde Should Never Be Head Of The IMF – by Liam Halligan

  1. Ursa Major says:

    From Eric Kraus: Actually, I could not disagree more with Liam on this one – I think her a weak candidate because she has been nothing more than the “porte serviette” for Sarkozy – whatever he says, she automatically agrees with. As for the West having too much influence on the Fund (and World Bank) I of course agree, but this is absolutely NOT the time to reverse it, at least at the IMF. While classically, the IMF has been there to bail out/assist/restructure developing countries in budgetary trouble, the crisis is now centered in the developed world – from Japan to Washington to Athens (and in approximately that order). The stuff about “creative destruction” is fine for folk who never lived through the Great Depression or the Second World War, however such full scale experiments – gone wrong – can prove really interesting for future historians, but acutely miserable for those who happen to live through them…

    • Max Gutbrod says:

      The IWF job in the moment is indeed about explaining the French and the Germans that they could not only sink the World financial system if they let Greece get bust, but also the whole of the European Union. Whilst states like Argentina and Russia have let investors down by calmly violating lots of international investment agreements, the fundament of the EU is not doing so. Maybe getting into a new job speeds up a learning process that has not had any European finance minister look too convincing: The alternive is not fund or have Greece leave the Eurozone, but rather fund or Greece leave the EU and a number of Euorpean states that cannot be determined in advance loosing acces to capital markets for a couple of years.

  2. Truth and Beauty is required reading, in my view. And it’s not often I disagree with Eric.

    The fact is though, whether you like the IMF or not (and Eric clearly does not), the need for a central body that has the ability to rescue countries from the fiscal incontinence of their own so-called “leaders”, and impose reality in order to protect the rest of the world from related “contagion”, has never been higher.

    While there is some truth in the notion of “economic decoupling”, the idea of “financial de-coupling” is a myth. Global markets are becoming more and more inter-connected. So we need the IMF, or something like it, now more than ever.

    Imposing a politician as IMF boss who still harbours ambitions of high office can do nothing but undermine the Fund’s ability to take and impose the tough decisions that some Western politicians seem incapable of taking themselves. This is particularly true if the politician in question actually hails from the very region that needs to hear harsh truths perhaps more than any other part of the world.

    The best person to lead the IMF is someone from one of the emerging markets (EMs) who combines genuine economic expertise with political smarts and who has a track record of successful policy reform, of facing down vested interests and of speaking truth to power.

    We need a IMF boss from the EMs not only to correct the massive pro-Western favoritism and discrimination of previous decades – and to signal to the rest of the world that the West “gets it”. That is reason enough.

    In addition, though, the EMs now have the fiscal strength and reserve. Their policy elites also have recent experience, in tricky political conditions, of steering through successful fiscal consolidations. The current batch of Western “high-ups”, in stark contrast, generally comprises over-pampered, spin-obsessed, economically-illiterate drongos – who are expert only at avoiding reality and kicking the can down the road.

    There are quite a EM few candidates who fit the bill to lead the IMF – and who could help steer Europe away from the cliffs while commanding the respect of the EMs and helping to usher in a new economic world order. These include Fraga and Manuel. Dervis is also very capable, but perhaps the prospect of a Turk taking the punchbowl away from the Greeks would open up Pandora’s box.

    The stand-out candidate to run the IMF, in my humble view, is Alexei Kudrin. I am serious. Kudrin has now been Russia’s Finance Minister for 11 years and, in terms of track-record, intellectual heft and political courage, he is head and shoulders above practically all of his international peers. I ain’t gonna float his name in my Sunday Telegraph column, though, ‘cos the Western world simply isn’t ready to consider the idea of a Russian at the top of the IMF. In addition, Kudrin is doing a fantastic job where he is – and I don’t want him to leave !

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