Does the IMF Need a European Leader?

Another cross-post from the work blog.

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Between now and the selection of the new IMF Managing Director on June 30, the three European countries responsible for 40% of the IMF’s current lending commitments will seldom be out of the spotlight. Portugal is due to choose the government that will ultimately have to implement the policies to secure its €78bn bailout. The Greek government will have to present yet more austerity measures and implement privatisation of €50bn in government assets in order to secure the next tranche of its loan, which is reportedly at risk of not being released, and faces GDP figures, bond repayments and in all likelihood a general strike before the month is up. Ireland will desperately seek a cut in the interest rates on its €85bn bailout as it fights off rumours that another one will be needed.

As the IMF leadership decision draws nearer, there can be no doubt about the importance of the relationship between the Fund and Europe. But what does that mean for the board tasked with selecting Dominique Strauss-Kahn’s replacement?

While there are nominally at least two candidates to become the next MD, and by some accounts as many as five, all eyes are going to be on the European candidate, France’s Christine Lagarde, when nominations close on June 10. And not because she’s the frontrunner: June 10 is also the day that France’s Court of Justice is expected to decide whether Lagarde will face a judicial review over her role in the 2007 Tapie affair.

Lagarde, who was widely tipped for the job even before Strauss-Kahn officially resigned on May 18 amid allegations of sexual assault against a New York chambermaid, was the first to declare her candidacy and did so despite the question mark over whether her intervention in a legal dispute between tycoon Bernard Tapie and Credit Lyonnais, which saw Tapie awarded €285m in damages from the then public owned bank, constituted an abuse of authority. But if judges rule next week that Lagarde should be formally investigated, can she still go ahead with the IMF candidacy?

When Lagarde was appointed Finance Minister in 2007, she became the first woman to be put in charge of the finances of a G8 country. If she goes ahead with her candidacy and is successful, she will be the first woman appointed to the head of one of the world’s most powerful financial institutions since its inception in 1945. However, if the judicial review goes ahead, Lagarde could become the second IMF chief in one year to go before the courts, a scandal the IMF would be keen to avoid.

There’s clearly a strong argument that Lagarde should not be touted as a shoo-in for the job with a legal black cloud hanging over her head. However, the long-standing tradition that says that the IMF chief is always European has been a hard one to shake, especially in an age of high-profile IMF lending to European countries. European leaders have thrown their support behind Lagarde, arguing that a European MD, and one that has previously shown support for bailouts, is needed to understand the fiscal and structural problems and solutions in Greece, Ireland and Portugal. At present, there’s only one candidate who fits the bill.

But does the IMF really need a European to solve a European problem? After all, during the Latin American debt crises of the 1980s and 1990s, nobody suggested that having an Argentine at the helm of the IMF would be a good idea. Could the experience of candidates from emerging economies be just the ticket? Banco de Mexico Governor Agustin Carstens is so far the only publicly declared candidate, with former South African Finance Minister Trevor Manuel and Kazakh National Bank Chairman Grigory Marchenko also rumoured to be contenders. Carstens argues that a Latin American who has experienced debt crises but has a good fiscal record is what’s actually needed to help mend the problems in the euro zone.

Aside from that experience, a non-European candidate also brings distance from Europe, which European leaders may fear, but could be exactly what the IMF needs. It may be that someone who doesn’t feel a national attachment to preserving the euro is better able to make critical decisions on IMF lending to the euro zone; it may also be that during the next MD’s five year term, focus will shift and crises will emerge elsewhere, mooting the current ‘need’ for a European leader.

The French judges’ decision next week should give us a clearer picture of where the IMF race is headed. If Lagarde is cleared by the Court of Justice, she is all but certain to be appointed MD, unless the US throws its support behind Carstens. If the Court rules in favour of a judicial review, Lagarde’s success is much less clear-cut. Barring the sudden, last-minute declaration of a second European candidate, a withdrawal would mean the likely appointment of Carstens.

Disastrous as an inquiry would be for Lagarde and the French political sphere, it need not be a crisis for Europe and the IMF. Any competent managing director will be able to negotiate and handle the existing EU bailouts, and the IMF could benefit from the opportunity to appoint its leader based solely on merit rather than at least partially on nationality, as well as the chance to be more representative of emerging economies.

The benefits of a non-European MD deserve to be considered whether Lagarde remains in the running or not, and certainly when the next appointment comes around. Europe will not be able to claim forever that it is at the same time most competent to run the IMF and most in need of its help.