Personal qualities notwithstanding, Christine Lagarde’s appointment as Managing Director of the IMF was widely seen as a confirmation of Europe’s grip on the governance of the Fund. But ironically, her main mission may well end up being to sever the IMF from too many European entanglements. And she may well carry the right passport for this task. Here is why.
A familiar pattern from policy history is that leaders from one side of the political spectrum end up conducting policies that normally belong to the other side’s agenda. Recent examples include Angela Merkel’s bail-out of Greece and George Papandreou’s harsh social reform. Meanwhile, Barack Obama is about to embark on spending cuts. Popular comments often attribute such apparently inconsistent behaviour to pandering. But as pointed out in the late 1990s by Axel Cukierman and Mariano Tommasi in a paper entitled “Why does it take a Nixon to go to China?”, there is a deeper logic behind it. Indeed, imperfectly informed citizens are more ready to accept right-wing measures from a left-wing politician, or dovish initiatives from a hawk, because they suspect that they are not inspired by partisanship. Their reasoning is that if a politician endorses the other camp’s agenda, it must be because the national interest calls for it. In the same way, only a European head of the IMF may be able to let the Europeans accept that it is time for the institution to take distance from Europe.
The IMF Ms Lagarde is taking office at is deeply immersed into European affairs. First, it has committed to it an unprecedented share of its resources. About sixty per cent of all its outstanding loans are to Europe (and thirty-five per cent to the euro area alone). This proportion is already comparable to that reached with Latin America at the end of the 1980s (also sixty per cent) and twice higher that that reached with Asia at the end of the 1990s. In addition, money committed to Greece, Ireland and Portugal but not yet disbursed amounts to another sixty per cent of outstanding loans.
Second, the IMF finds itself in uncomfortable partnership with EU lenders. In the euro area, it provides only one-third of the money, while the other two-thirds are provided by EU countries. In the rest of the EU, it provides two-thirds of the money and the EU the other third. It is therefore more constrained than when lending alone, and more so in the euro area where it is a minority lender. True, cooperation with the EU has not gone badly, in spite of occasional disagreements (and a generally more accommodative Fund stance on the pace of adjustment in crisis-affected countries). But the more challenging and conflict-ridden the adjustment becomes, the more uncomfortable the Fund’s stance. As a global institution, it is accountable to all its members and it is bound to ensure policy consistency and equality of treatment across countries worldwide. The EU is not. Conversely, it is not itself bound by the Europeans’ multiple and conflicting taboos.
Third, the IMF in the last two years has become a player in Europe’s governance game. Because the Europeans were finding it so difficult to agree on the need for assistance to countries in trouble, the creation of a financial facility, or the terms of lending, the IMF has increasingly substituted the failings of European governance. Dominique Strauss-Kahn in his last year at the Fund had become an essential negotiator and advocate of the European compromises. This role is as unsustainable for the future as it was indispensable at the time Strauss-Kahn embarked on it.
Christine Lagarde cannot afford to let the Fund become an institution whose resources and energy are essentially devoted to one region, furthermore one of the richest in the world. This would quickly antagonise Asia, where the resentment created by the crisis of the late 1990s has only marginally abated. An IMF deprived from its Asian constituency would inexorably, if gradually, fall into global irrelevance. So she must seize the initiative and recast the role of the IMF in Europe.
What can she do? On lending, not much. The reason why the Fund has committed so much to Europe is not because it is generous but because its European clients are in serious trouble. Greece needed money because it could not borrow anymore on the markets and if anything, it will soon need more as it has become clear that the assumption of it returning to the market in a year is totally unrealistic. The Fund is bound to become even more involved in Europe in the years to come.
On partnership, Ms. Lagarde needs to set the principles clear. Being a minority lender, the Fund can hardly call the shot. But it can state unambiguously where its red lines lie. It started to do so a few weeks ago, indicating that it could only disburse further on the condition that the Europeans agree on continued lending to Greece. In the end its bluff was called and it had to bite the bullet. But the issue remains. Christine Lagarde should set out where the Fund stands on the key choices facing Europe, including debt restructuring, and delineate as much as possible responsibilities for decisions, so that the Fund and the EU can both be accountable to their constituencies.
On governance, the IMF cannot continue to play the role of an extraterritorial tutor. Its role is exercise surveillance and offer advice to the EU, and there is much it can do in this respect to help Europe reform itself. But it belongs to the Europeans to govern themselves.
Having served as a French minister of Finance for four years, Ms. Lagarde is the quintessential European insider. She is now uniquely placed to tell the truth to her former colleagues.
A version of this column was also published by Eurointelligence