Wednesday 17 July 2019

Colm McCarthy: 'Bank on it - Lagarde won't please everyone'

She's French, a lawyer and a politician - qualities to stir antipathy, but Christine Lagarde did a decent job at IMF, writes Colm McCarthy

Has her critics: Christine Lagarde's appointment as President of the European Central Bank was a surprise. Photo: SAUL LOEB/AFP/Getty Images
Has her critics: Christine Lagarde's appointment as President of the European Central Bank was a surprise. Photo: SAUL LOEB/AFP/Getty Images

Christine Lagarde's surprise selection as next president of the European Central Bank has been greeted with dismay in some quarters, centred on concerns about technical competence and experience. Lagarde is a lawyer - all previous ECB presidents have had backgrounds in economics, central banking or both.

Lagarde is also a politician, moreover French, and there is antipathy on both counts. But she has by common consent done a decent job as managing director of the IMF and there has been at least one previous incumbent at Frankfurt with better paper qualifications, coincidentally French, of whom the same could not be said.

Critics of her appointment argue that the next ECB president will need the technical proficiency displayed by the current incumbent, Mario Draghi, whose term expires in October. Draghi, a professional economist and former Italian central bank governor, is regularly described as the saviour of the single currency and has repaired the ECB's reputation since his appointment in 2011. It needed repair: when the European leg of the great banking bust got under way in 2007, the response in Frankfurt was slow, at times perverse, and contrasted unfavourably with the speedier and more coherent approach by central bankers in the USA and elsewhere.

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In the early years of the crisis, the ECB, and the Eurogroup of finance ministers, indulged in a self-satisfied narrative that the crisis was essentially an American cock-up, inflicting undeserved collateral damage on a blameless Europe. They were in denial, since the European banking system had been permitted by incompetent managers and sleepy regulators to extend dodgy credit, in Europe as well as in the USA, off the back of thinly capitalised balance sheets. Some prominent European banks have still not fully recovered, and the fault lies in the incomplete design of the common currency area and the sluggish pre-Draghi response. The ECB inexplicably raised official interest rates twice during the crisis and only in 2012, after a change of leadership, did ECB policy catch up with the more assured reaction across the Atlantic.

Lagarde's detractors observe that she is neither an economist nor has she run a central bank, and they discount her stint at the controls in Washington. The IMF is an important organisation, but it does not set interest rates, nor does it oversee a financial system or a currency. It is sometimes described as "the world's central bank", but this is a poor analogy - it is more akin to a credit union for governments. It was slow to acknowledge the mistakes made during its ill-fated dalliance as junior partner in the 'troika', especially in the disastrous first bail-out of Greece in early 2010, and there are current headaches with IMF programmes in Argentina and Ukraine. But the IMF does not get to choose credit-worthy borrowers and headaches are the client base. Lagarde acknowledges that the troika arrangement will not be repeated, and has absorbed professional advice capably at the IMF. There is no reason to expect her to do anything different in her new assignment and the Irish government has welcomed her nomination.

Two personal episodes in Lagarde's earlier career have been dredged up by her critics. She was, as a young woman, a member of the French synchronised swimming team, a sport whose elevation to Olympic status attracted the deserved put-down "drowning by numbers" from Princess Anne, an accomplished equestrian competitor, in 1984.

She also faced prosecution before a curious French tribunal called the Cour de Justice de la Republique, a 'court' whose jurisdiction extends only to politicians and senior officials, and whose non-jury bench consists of three judges and, unbelievably, 12 politicians. It has only heard five cases in its history and is empowered to impose fines and imprisonment, without right of appeal. Lagarde was accused of showing leniency to a prominent French rogue, Bernard Tapie, over a commercial compensation pay-out.

The allegation related to her period as Finance minister in the cabinet of another rogue, Nicolas Sarkozy, who had received campaign funding from Tapie. Lagarde, it is alleged, referred to an administrative process a claim by Tapie against the state that she should have resisted in court. Tapie got awarded €400m and Lagarde was accused of having chosen the soft option, under pressure from Sarkozy. The 'court' found her guilty of negligence but imposed no penalties and did not enter a criminal conviction.

Tapie, whose earlier career included a spell in the slammer for fixing matches while owner of the Olympique Marseilles football club, was subsequently ordered by a more conventional court to repay the money, and is currently facing charges, as is Sarkozy. Two hundred and 30 years after the revolution, the separation of powers remains a challenge for France and Lagarde was guilty, at worst, of picking the soft political option under pressure. Some continental websites have written that she is a 'convicted criminal', which is entirely untrue, would attract instant libel proceedings in these parts.

During the Trichet reign at the European Central Bank, Lagarde was an influential member of the Eurogroup of Finance ministers which acquiesced in the imposition on Ireland, a country already in an IMF programme, of 100pc pay-outs to hedge funds and other holders of worthless bonds issued by bust banks already in the process of closure.

The financial damage has been mitigated by a combination of good fortune and the cooperation of Draghi in the re-financing of the Anglo-related promissory notes. But the episode should linger long in the minds of the Irish public and of Irish politicians, especially those who were members of the incoming 2011 government cut off at the knees in its first weeks in office by Trichet's ECB. This group includes Leo Varadkar and Simon Coveney. Should Christine Lagarde's ECB appointment be confirmed, she will appear in due course at the European Parliament and, if she follows Draghi's example, at the Oireachtas finance committee. She should be quizzed about her personal stance when the deed was done, with no 'friend of Ireland' codology. Did she support Trichet, and why?

There is a prospective vacancy at the IMF, which by convention is always filled by a European - the Americans get to pick the World Bank chief. With Lagarde at the ECB, there is little prospect of a French candidate succeeding and there will be a contest, with assorted non-French European hopefuls and demands that somebody from outside Europe or the USA be chosen. All Eurozone members, including vulnerable countries with high debts, are members of the IMF and entitled to seek support in Washington if the going gets rough. It would be nice if there were an Irish candidate, and the ever-alert Financial Times has discovered one in the respected Bank of England governor Mark Carney. Carney, who finishes up in December, has shown exemplary patience with UK politicians during the Brexit fiasco, needs a break and would be superbly qualified, having distinguished himself earlier as governor of the Bank of Canada through the financial crisis.

A Canadian citizen, he also holds an Irish passport - three of his grandparents hail from Mayo. The lead member of Ireland's IMF constituency is none other than Canada. This must be serendipity.

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