Lagarde: Resolving European debt crisis requires global effort
By Howard Schneider,
International Monetary Fund chief Christine Lagarde is calling on countries outside Europe to help battle the region’s financial crisis, warning that the debt problems could drag down nations elsewhere by spilling over into global trade and international bank lending.
“International support, solidarity, needs to be present,” Lagarde said in an interview last week assessing her first six months at the International Monetary Fund, a period of mounting turmoil in Europe.
“That part of the world can address some of its issues,” she said. But “the crisis is sufficiently acute that it is going to be felt, and we are seeing it in all regions. . . . The risks are all over the map.”
Lagarde’s comments come as the agency undertakes a sensitive discussion about how to boost the emergency funding it can provide Europe without seeming to underwrite this relatively wealthy part of the world. Many officials, including some in the Obama administration, argue that Europe can afford to tend to its own problems. Lagarde has not said how much more funding she would like the agency to make available to Europe.
The debate promises to intensify during the U.S. election campaign, with a pending increase in the agency’s finances under attack by congressional Republicans skeptical of IMF involvement in Europe.
The issue demonstrates the fine line the former French finance minister has had to walk in her first months at the agency as she tries to reconcile the trudging political machinery of her home region with demands from elsewhere for Europe to do more, faster, to help itself.
Taking over after the arrest of her predecessor, Dominique Strauss-Kahn, on sexual assault charges, Lagarde said the transition was less difficult than she expected. The charges against Strauss-Kahn were dropped, but Lagarde had worried that the trauma would continue for the agency.
But people were ready “to turn the page and move on,” she said. “In that sense, the healing was not a painful or lengthy exercise. . . . We don’t talk about it. Next chapter.”
Policy, however, has proven tumultuous. Lagarde has overseen a shift in the IMF’s approach toward Europe that has led to clashes with some of her former European colleagues on such key issues as bank regulation. This evolution in approach has arguably drawn her closer to U.S. recommendations for the region.
The fund, in particular, took a harder line toward Greece, strengthened the case for having private investors in Greek bonds take deeper losses and adopting a stricter tone toward Greek political leaders, who were lagging on promised reforms. There were disagreements within the agency over the best approach, and the head of the IMF’s European division, who opposed the change, soon departed.
“We had to be forthcoming and perfectly honest about our numbers and analysis,” Lagarde said. Documents prepared for an October summit in Brussels, for example, gave European leaders the stark choice of funneling more of their taxpayers’ money to Greece or imposing deep losses on banks and other investors in Greek bonds.
Among the fund’s staff members, she said, “there were different views. . . . When we walked into the room, we knew we had to get out of the room with one view — the view of the fund.”
More difficult debates are on the horizon.
Absent the possible need to bail out a country the size of Italy or cope with a crackup of the euro zone, the IMF’s existing financial capacity would probably be adequate. Yet with Europe’s crisis escalating, the agency may face problems that outstrip its available funds.
Lagarde accused European officials of acting too slowly to address key issues at the start of the crisis and of failing to convince international investors that proposed rescue plans would work.
But she also noted that the steps the euro region is taking are “transformational,” moving the 17 nations of the euro zone toward closer economic union. Yet the measures have been treated as “almost irrelevant as far as some of the investors are concerned or as far as the markets are concerned.”
That transformation will take time, she said. In the meanwhile, the fund — and the rest of the world — will have to muster the resources needed to prevent the crisis from deepening, she added.
“Everybody is going to have to play their part,” Lagarde said.
What that means remains unclear. The Obama administration, for example, faces budget constraints and has said it does not expect to contribute more to the IMF than currently planned.
But that position masks a potentially important political battle that may be in the offing as the U.S. presidential campaign heats up. The IMF board has approved a doubling of the capital to be paid in by its members — an increase of about $364 billion. The increase in IMF “quotas” won’t apply to any of the fund’s worldwide members unless Congress approves the U.S. contribution — reflecting the U.S. role as the largest IMF shareholder. The U.S. share of the pending quota increase is about $64 billion.
Administration officials have not said when they will submit the quota increase for congressional approval. Lagarde has begun meeting with some congressional Republicans — many GOP lawmakers don’t want U.S. taxpayers to help bail out Europe — and said she plans more intensive conversations.
“I am very keen and very willing to do that and be as transparent as possible, to open the books as much as possible,” Lagarde said. “The U.S. is the first economic player in the world, and it has to continue to be a leader in the world economy. The best way to demonstrate leadership is to participate, not to withdraw.”
The outcome of that debate could help define her tenure at the agency. Lagarde is not only the IMF’s first female chief and a non-economist (she is a lawyer by training). She may be the one who solidifies the expansion of the organization’s global role.
After six months, she said she has had little time to herself. Beyond recommending the almond croissant at the Georgetown branch of Paul — a French chain, after all — she is hard-pressed to name a favorite restaurant in her new home town. A longtime swimmer, she says she has yet to join a local pool. Staff members say she continues to practice yoga regularly.
So far, she says, her background as a lawyer has, if anything, been a plus in an era in which political negotiation and boardroom skills have become as important to the fund as hard-core analytics.
“There are so many economists in this place,” she said. “What would be my additional contribution?”