The conviction of Christine Lagarde by a French court on charges of negligence and misuse of public funds while she was finance minister of France has refocused attention on her current role as managing director of the International Monetary Fund (IMF). That attention comes at a time of myriad questions about the attitude of the incoming Trump administration toward the Fund and similar institutions of international economic and financial cooperation.
A Trump administration, in its stated policy of "America First," may well be inclined to be skeptical over whether these institutions can help to achieve its aims, as many leading Republicans have been in the past. Nevertheless, it is likely that when the first financial crisis erupts in a country of interest to the United States, think Venezuela, the United States will be forced to turn to existing tools of international cooperation, such as the Fund. The new administration will likely find that it is inefficient and ineffective to try to cobble together a coalition of the willing to address every international economic problem into which it is drawn, in particular where the problem takes the form of a financial crisis and financial assistance requires an act of the US Congress.
The fact that a Trump administration will probably end up using tools such as the IMF to advance its immediate aims does not necessarily mean that it will continue to play a leadership role in supporting the institutions. On the other hand, leaders of other nations, with or without the United States, will continue to support the formal and informal institutions of economic cooperation to address common problems. Besides the IMF, the formal institutions include the multilateral development banks, the Organization for Economic Cooperation and Development, the World Trade Organization, and the Bank for International Settlements. The informal institutions include the Group of Seven industrial countries, the larger Group of Twenty (G-20) countries, and the array of groups under the aegis of the Financial Stability Board. The United States has been the dominant player in these groups as they have evolved since the end of World War II.
If the Trump administration declines to continue to support the further evolutions of these institutions, at a minimum it should step out of the way and cede leadership to other countries. The major emerging-market and developing countries, such as China and India, strongly support these institutions and are more than prepared to lead them and replace the United States and Western Europe.
The major emerging-market and developing countries, such as China and India, strongly support these institutions and are more than prepared to lead them and replace the United States and Western Europe.
US support for these institutions has been waning for years. A prime example was the Obama administration's five-year effort to persuade the US Congress to approve the IMF governance reform package that was agreed by the G-20 in 2010. The package modestly increased the financial resources of the IMF and modestly redistributed voting power in the Fund away from Europe and toward the dynamic emerging economies. The approval a year ago triggered a decision by IMF members to develop a new package of governance reforms and additional financial resources by 2019, late in the forthcoming Trump administration. It must decide whether to support additional resources for the IMF, which would require approval of the US Congress likely to come after the 2020 election.
The US legislation a year ago also came with a potential poison pill in terms of US support for the IMF. If the United States is going to continue to provide financial support for the Fund via its New Arrangements to Borrow, to which the United States has committed almost $40 billion, in its renewal in 2022, the US Congress must approve. This will be a challenge for the next administration and presumptively the next managing director of the IMF, but the basis for meeting or not meeting that challenge will be laid by the Trump administration and the leadership of the IMF under Madame Lagarde.