Friday 23 February 2018

Europe's IMF favourite

Ministers line up behind Lagarde as other countries try to break the Euro stranglehold on the top job in global finance body

Following Dominique Strauss-Kahn's dramatic resignation as IMF managing director, French finance minister Christine Lagarde has emerged as the most likely candidate to succeed her fellow countryman.

It has been easily the most dramatic week in the International Monetary Fund's 67-year history. Strauss-Kahn, the charismatic managing director of the IMF, was pulled off a Paris-bound Air France aircraft at Kennedy Airport in New York last Saturday afternoon and arrested on suspicion of attempted rape.

As ever-more lurid details emerged of what allegedly happened between Strauss-Kahn and a chambermaid at the $3,000-per night (€2,100) Sofitel Hotel in Manhattan, along with accusations of previous misbehaviour toward women, his position as IMF boss rapidly became untenable.

Even before he submitted his resignation to the IMF board on Thursday, the race to succeed Strauss-Kahn was already well under way.

The IMF and the World Bank were founded after the 1944 Bretton Woods conference, which was held to begin to rebuild the global financial system that had been shattered, first by the Great Depression and then by World War Two.

The IMF serves as lender of last resort to countries that can no longer borrow on the international capital markets. Its loans come with strict conditions attached, with the recipient countries expected to slash public spending, liberalise their economies and sell state assets. Its sister organisation, the World Bank, concentrates on lending to developing countries for capital projects that will reduce poverty.

Ever since their formation there has been a "gentlemen's agreement" that the managing director of the IMF would be a European, while the World Bank president would be an American. In recent years, this transatlantic stitch-up has been coming under increasing pressure. Indeed at the time of Strauss-Kahn's appointment in 2007, he and the finance ministers of several European countries promised that next time around the selection wouldn't be exclusively confined to European candidates.

That was then and this is now. The departure of Strauss-Kahn has fired the starting gun on what is already shaping up to be the mother of all succession battles with China, India and other developing countries determined to break the European stranglehold on the IMF.

It is a tribute to the effectiveness of Strauss-Kahn's leadership of the IMF, an organisation that was drifting into irrelevance in 2007, that his resignation has ignited such a bitter succession battle. Strauss-Kahn exploited the opportunity created by the 2008 global financial meltdown and the ongoing eurozone crisis to reposition the IMF centre-stage. In 2009, its member countries agreed to triple the IMF's lending capacity to $750bn.

The IMF played a central role in devising the Greek, Irish and Portuguese bailouts. Last year, it lent countries a total of $92bn. Whoever is named as the new managing director of the IMF, he or she will be a major player in global finance.

Europe's governments seem determined that the new IMF boss will be another European. Already German chancellor Angela Merkel has publicly stated her preference for a European candidate. EU Commission president Jose Manuel Barroso has also come out in favour of giving the job to a European nominee.

This desire to preserve the status quo is only partially explained by the determination of Europe's leaders to retain control over what is, after all, a plum appointment. Very few politicians willingly surrender patronage opportunities of such magnitude.

However, it is the key role that Strauss-Kahn's IMF played in structuring and funding the bailouts of the eurozone's peripheral economies that provides the primary explanation for Europe's determination to retain control of the reins. With Greece, which was the recipient of a €110bn EU/IMF bailout 12 months ago, seemingly inevitably destined to default on its €330bn debt mountain, it is clear that there is much more work to be done before the crisis on the eurozone periphery is finally resolved.

With 35pc of the votes, an agreed European candidate is in pole position to secure the job. With the United States controlling a further 18pc of the votes, the European runner is guaranteed election if the transatlantic pact holds -- which, in practice, it probably will. If the US were to throw its weight behind a non-European candidate it would almost certainly invite retribution the next time the presidency of the World Bank came up for grabs.

Mindful of the growing clamour from the developing countries, Europe needs to unite quickly behind a single candidate if it is to retain its grip on the IMF. That candidate is almost certainly going to be French finance minister Christine Lagarde, who, ever since she was first appointed to the position in 2007, has steadily grown in stature. With her striking looks and flawless English she, rather than any of her linguistically challenged male counterparts, has become the de facto spokesperson for the eurozone finance ministers. It also helps that she is very good at her job.

The French economy and banking system have weathered the global downturn better than those of most other developed countries. In 2009, she was voted best finance minister in the eurozone by the 'Financial Times'.

However, she does suffer from one potential handicap. Unlike Strauss-Kahn and most previous IMF managing directors, Ms Lagarde isn't an economist but a lawyer. After studying law she joined the Paris office of American law firm Baker McKenzie in 1981 specialising in labour and anti-trust law. The bright young woman quickly rose through the ranks becoming a partner in 1987 and managing partner of the Paris office in 1991.

In 1995, she was elected to Baker McKenzie's executive committee and became chairman in 1999. During her five years as chairman, Baker McKenzie doubled its gross revenues to more than $1.2bn.

Lagarde returned to France in 2005 to become her country's foreign trade minister. Following the election of Nicolas Sarkozy as president in May 2007, she served briefly as agriculture minister before being appointed finance minister.

With such a glittering CV does it really matter that she didn't study economics at university 30 years ago? Almost certainly not. Far more important is that her four years as French finance minister mean that she is fully au fait with the ever-worsening euro crisis.

If the IMF were to appoint a non-European to the job then he or she would inevitably need some time to get fully up to speed on the eurozone crisis, whereas Ms Lagarde would be able to hit the ground running. With the IMF having called yesterday for a "more comprehensive" European approach to the region's debt crisis, banker-speak for getting the finger out, it is clear that time is one thing the eurozone is rapidly running out of.

Almost three years after the Irish banking crisis first erupted and 18 months after the full extent of Greece's problems first became apparent, the eurozone is still making it up as it goes along, still pretending that there will be no bank failures and no sovereign debt defaults but obstinately refusing to do what is required.

The danger is that, by appointing another European, the IMF will facilitate the continuation of the current non-policy. If it does and the eurozone collapses then Lagarde will almost certainly be the last European managing director of the IMF.

Irish Independent

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