If nothing else, Christine Lagarde’s tenure at the International Monetary Fund has proved that neither being French nor being a lawyer is incompatible with high office in global economic government.
When she was appointed in 2011, critics pointed to her nationality and professional background as drawbacks. For most of the past five years, the IMF’s main task has been its rescue loans not to traditional emerging market clients but to western Europe and in particular the intensely controversial question of Greece. With French banks heavily exposed to Greek sovereign debt, Ms Lagarde risked being accused of a conflict of interest.
As for her professional background, having a lawyer run an institution of self-confident economists with PhDs would raise questions of credibility. Ms Lagarde has disarmed many of her critics, earning reappointment unopposed for a five-year term. For once, the consensus is right. Ms Lagarde has undertaken, at least partially, a course correction in the fund’s dealings with the eurozone and proved a calm and competent principal.
As it happens, the apparent weakness of her academic background has turned out to the fund’s advantage. Unlike her predecessor Dominique Strauss-Kahn, the economics professor who was wont to hand down IMF policy - and conduct other business - from the managing director’s office, Ms Lagarde has frequently deferred to the fund’s staff in formulating policy.
It was this that helped the IMF’s management change its approach in the summer of 2012, a year after her appointment. Until then, the fund had been too willing to go along with over-optimistic forecasts of Greece’s growth and debt sustainability. On the advice of senior staff, it correctly shifted position and pushed for a writedown in private holdings of Greek debt and more rescue money from the eurozone authorities. The treatment of Greece by the troika of official creditors has been far from perfect. But the IMF has consistently been the most constructive member of the three, and must continue to be involved as Greece tries to generate growth and pay down debt.
The global fall in commodity prices has opened up more traditional lines of business for the fund, lending to fill balance of payments gaps in countries such as Ghana which overborrowed on the basis of natural resource earnings that have now dried up. The prescriptions of the fund are familiar and inevitable: its emergency financing is made conditional on fiscal adjustment to return public and external deficits to sustainable levels. Wisely, the IMF now routinely has an additional presumption that private sector bondholders participate in any restructuring.
The IMF is in a good position to contribute to the stability of the global economy. Its arsenal has been replenished through rounds of new funding, and it has regained lost legitimacy by finally updating its member countries’ voting power more accurately to reflect the growing clout of emerging markets. Under Ms Lagarde, the IMF has successfully promoted co-ordinated fiscal and monetary expansion in the G20 and central-bank swap arrangements.
There is often talk about the decline of multilateral organisations. But unlike its sister body, the World Bank, which looks increasingly peripheral, the IMF is indispensable. No other country or agency wants the responsibility of being a universal global crisis lender, with all the risks involved.
It is wrong that Europe maintains an informal lock on the IMF managing director’s position. But on this occasion, Ms Lagarde deserves reappointment on merit.
