Christine Lagarde: With Europe ‘behind the curve,’ can IMF chief craft way forward?
By Howard Schneider,
In the more than 60-year history of the International Monetary Fund, Managing Director Christine Lagarde already stands out — in more ways than one.
The first woman to run the agency, Lagarde within weeks of assuming office had delivered advice on fiscal austerity in Forbes magazine and wardrobe tips to the readers of Vogue. (For the curious, it’s Chanel, Ventilo and Austin Reed.)
But she is also the first IMF director faced with a financial crisis that she takes partial responsibility for creating. If European banks are weak, as she has suggested, she had years as French finance minister to strengthen the ones on her home turf. If the 17-nation euro area has been “behind the curve” in dealing with its problems, as she said in a recent address at the Wilson Center, she was an important voice in crafting responses that were too slow and too timid.
“I’m prepared to take some of the blame,” she said to the audience, acknowledging what many on the outside have long maintained: that Europe’s drawn-out consensus-seeking has not kept pace with international markets that have turned on countries such as Greece and are poised to turn on the likes of Spain and Italy.
European leaders have said the right words, made the right commitments and taken steps once considered unthinkable, such as pledging hundreds of billions of dollars to a common fund to support weaker nations. They have also allowed the European Central Bank to move beyond its traditional inflation-fighting mission in ways that have divided its governing board, and they have used the creditworthiness of fiscally disciplined nations such as Germany and the Netherlands to underwrite overspending in Greece, bank excesses in Ireland and poor economic planning in Portugal.
But nearly two years after it became apparent that Greece’s debt load was unsustainable, Greece still has no clear path out of recession and away from default. The strength of the larger European economy has been called into question, and countries are torn between slashing public spending to make their books look better and risking slow growth or renewed recession because the other parts of their economies are so weak.
“Social tensions,” Lagarde said, seethe below the surface in the form of chronically high unemployment and the danger of a “lost generation” of jobless youths in the heart of the industrial world.
Europe’s approach has been “directionally right,” Lagarde said, but “too slow and a little bit behind the curve.”
As the fund’s annual meetings approach — the first on Lagarde’s watch — the questions now are how she will respond and adapt and whether she can make a tangible difference in Europe’s ability to fix a set of problems that threaten the global economy.
There are other issues. China remains obstinate on financial and currency reform. The U.S. debt is a $14 trillion elephant in the room. But Lagarde will be judged on Europe and how successfully she can change from national advocate to international taskmaster.
Less than three months into a five-year term, Lagarde has had little time to get her footing. The start has not been smooth.
She inherited an institution that, in her own words, needed “healing” after then-Managing Director Dominique Strauss-Kahn was arrested in New York on sexual-assault charges. Many thought that her stature as a female executive would help clear the air not only of Strauss-Kahn’s arrest (the charges against him have been dropped), but also of an earlier incident in which he was reprimanded for an affair with a female employee.
But as for her success on the job, “the jury is still out,” said Arvind Subramanian, a senior analyst at the Peterson Institute for International Economics and a former assistant director of the IMF’s research department.
Lagarde was among the leaders who negotiated and approved a new bailout for Greece in July that allowed small states such as Finland to demand collateral for their portion of the emergency loans. The IMF now opposes the provision, and the Finnish demand for collateral could hold up aid that Greece needs if it is to pay international bondholders.
She received credit from some for her blunt language about Europe’s banking system, saying that euro area institutions needed “urgent recapitalization” during a speech she gave at the Fed’s annual conference in Jackson Hole, Wyo.
Her former European colleagues took offense and said so. They worry that criticism of their banking system could trigger a self-fulfilling prophecy if it scares off investors.
Her language subsequently softened — a “step back,” not a “backtrack,” she calls it. She now says only that banks, generally, need to be strong to finance growth, not that European banks need any particular attention.
“We are not trying to point a finger or give a health bill to bank X, Y or zed,” she said in an interview last week.
For those who applauded her sharper tone at the Jackson Hole conference, that step was a disappointment.
“Intellectually, she was on the money when she said European banks were a problem,” Subramanian said. “It is as if, after the reaction she got, she is taking a little more hands-off attitude towards Europe, which is not going to be sustainable.”
It’s an issue every IMF chief faces — how to balance the job’s bully pulpit with quiet diplomacy and the agency’s more overt power: access to financing that can force change.
Regarding Europe, the bully pulpit — or the power to “name and shame,” as Strauss-Kahn called it — may be one of Lagarde’s chief tools.
As a lawyer without the technical economics background shared by other IMF heads, she was hired as much for her diplomatic and political skills as for her ability to second-guess the numbers that the IMF staff presents to her.
The IMF has extended emergency loans to Greece, Ireland and Portugal, and the fund can use its control over the flow of that money to pressure the countries to make changes. But the fund has little direct sway over the larger problems Europe is debating. Some in Europe have even suggested that Lagarde would have had more influence as finance minister of France, the euro zone’s second-largest economy, than she has as IMF chief.
Charles Dallara, managing director of the Institute of International Finance (IIF), said he was worried about the fund’s lack of influence over the world’s major economies at a time when they are the source of instability. It is no longer currency flight or debt crises in countries such as Mexico or Indonesia that threaten the economy — problems the IMF is adequately equipped, funded and structured to deal with. Instead, it is the massive amounts of Italian, Greek, Spanish and other debt wired into Europe’s banking system, runaway entitlement spending in the United States, opaque Chinese policy that hoards trillions of dollars in foreign cash reserves. All of these are issues that the IMF can’t afford to address through its standard lending and over which it has demonstrated little ability to exert political influence.
The IMF’s standard oversight “has lost effectiveness as a tool for policymakers in the major economies,” Dallara said in a letter to finance ministers and central bank governors who will gather for the IMF’s annual session. The IIF acts as a trade group for the world’s major financial firms.
“There is a growing awareness that the drift that we have seen in global policymaking over the past months cannot be allowed to continue,” Dallara said at a news conference. “If it does, it could well lead us to another recession.”
It falls to Lagarde to regain the cohesion felt in 2009, when the financial crisis prompted major governments to act in unison and release hundreds of billions of dollars in stimulus spending to prop up their economies. The economic momentum generated by those measures has been spent; the spike in public debt remains.
She has asked the developed world to square the circle — to find a way to reduce deficits without undermining growth.
She has accepted blame.
Can she help find the way forward?