Lagarde's IMF Legacy: A Stronger but Still Vulnerable Fund
After eight years as managing director of the International Monetary Fund (IMF), Christine Lagarde will become the president of the European Central Bank on November 1. Her tenure at the Fund was not without mishap, but she served the institution and became a consummate diplomat, skillful communicator, and substantive innovator. Nevertheless, the IMF remains vulnerable to the centrifugal forces affecting the global economy and imperiling financial cooperation.
Lagarde was a unique IMF leader: its first female head, a former French finance minister who had not spent decades engaged in international finance diplomacy, replacing a disgraced Dominque Strauss-Kahn from her home country.
Early on, Lagarde separated herself from her previous position as France’s finance minister, by focusing on the capital weaknesses of European banks. She inherited the euro area debt crises with its fraught euro area politics. She allowed the Fund to cave to German demands to constrain the size of the program for Cyprus and did not object to an initial decision to impose haircuts on insured bank deposits to do so. But on the Greek program, Lagarde stood her ground against the demands of Greece’s European partners, insisting that they grant more debt relief to Greece and relax their austerity requirements.
In coaxing and cajoling the United States in 2015 finally to approve the 2010 agreement on quota and governance reform, she was politically astute. She was patient and persistent in guiding the executive board to include the Chinese renminbi in the basket of currencies that make up the Special Drawing Right (SDR). I criticized the decision on substantive grounds, but Lagarde and the IMF staff at least used the leverage of including the renminbi in the SDR basket to get China to liberalize capital flows.
During her tenure, Lagarde focused, some say excessively, on communication. However, she became the face of the Fund, including in many nontraditional venues. She softened perceptions of the Fund as solely focused on fiscal austerity and serving principally the interests of public and private creditors. She expanded public understanding of the IMF even as some of us winced at the frequent references in her speeches to her athletic career as a synchronized swimmer.
On substance, under Lagarde’s leadership, the Fund expanded and streamlined its lending instruments and upgraded its attention to financial issues both structural and behavioral. She revived the Fund’s focus on combating corruption and expanded its contributions to public policy debates on climate change, gender inclusion, and income inequality. To Lagarde’s credit, the Fund’s forays into these areas, which have been criticized, were well grounded in research demonstrating that these issues mattered for the Fund’s central concerns—economic growth and financial stability.
No institution can be successful without an effective leader, and no leader can be successful without a dedicated staff. Lagarde was an effective leader of a high-quality staff and a fast learner.
Lagarde leaves the Fund a stronger institution than it was in 2011. However, its vulnerability has increased. The principal challenge is that in a more multipolar world, member countries, the United States being the prime but not only example, have increasingly turned away from respecting the shared value of international cooperation and supporting international institutions. This challenge has three major elements.
First is IMF governance. Will the next managing director be a European as all the others have been? Unless the Europeans nominate, and other IMF members accept, a person who is at least as credible as Lagarde is as she exits the Fund, international political support for the institution as the linchpin of the global financial safety net will wane and support for regional institutions will increase. If the next managing director is a European, she or he also must have the integrity to challenge intransigent European countries to reduce their disproportionate representation in the Fund.
Second is IMF resources. As I have written, IMF members must agree before the end of 2019 to ensure that the Fund has adequate financial resources for the next decade. This matter is connected to the Fund’s governance. Even if agreement can be reached to replace some or all of the $450 billion in expiring bilateral commitments to lend to the IMF and/or to augment the multilateral New Arrangements to Borrow, the existing distribution of voices and votes in the Fund will be frozen for another decade in the structure that was agreed nine years ago. At the time, IMF members promised a further evolution in the direction of increasing the representation of dynamic emerging-market members.
Third is the Fund’s central mission. International monetary cooperation in an era of fractious international relations is under stress. Relations between the United States and China are a prime example. Unless both countries are bound to support multilateral financial cooperation, other countries will not feel bound. The risk is that 75 years of IMF success will become the thing of history books.
Christine Lagarde departs from the IMF leaving an impressive legacy. But the survival and enhancement of that legacy is far from assured.