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Lagarde’s IMF legacy holds clues to her ECB presidency

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When Emmanuel Macron offered Christine Lagarde the presidency of the European Central Bank on the sidelines of the G20 summit in Osaka in late June, she responded with a question: was Angela Merkel on board?

Once reassured of German support, the IMF managing director suggested other names for the job. But the French president said there was no plan B: “We don’t want anyone else.” 

European leaders’ enthusiasm is largely shared by current and former IMF officials who over eight years witnessed her political and diplomatic skills and ability to process and communicate complex economic and financial information. But some privately stress her lack of strong economic convictions and a discomfort with disagreement that complicated decision-making — particularly in her early years at the Fund during the eurozone crisis. 

The ECB president-elect will make her first appearance in the run-up to her new role next week, when she addresses the European Parliament — at a moment when the spotlight is shining on one of the biggest decisions she took: the $57bn bailout of Argentina.

Argentina this week faced a fresh challenge after asking creditors for more time to pay $101bn of debts, a move market analysts said pointed to a ninth sovereign default by the South American nation. That would cast doubt on the success of her tenure at the Fund. 

“It was a tall order for Lagarde to win over the Argentines, and a mammoth undertaking to try to repair the Argentine economy, and she staked her legacy on doing both,” said Benjamin Gedan, senior adviser for the Latin America programme at the Wilson Center, a Washington think-tank. “Should Argentina implode, it would be a worst-case scenario for the Fund and Lagarde.”

Ms Lagarde with Argentina’s president Mauricio Macri and treasury minister Nicolas Dujovne discuss the country’s $57bn bailout, which is now in danger of faltering © Reuters

Ms Lagarde‘s arrival in Washington in 2011 was quicker than usual — incumbent Dominique Strauss-Kahn had quit facing sexual harassment allegations, and the then-French finance minister was catapulted into the role. 

“If France wanted to keep the job, it had to immediately propose a name to replace DSK and it was obvious for all of us that the only name with enough credibility to win over our partners was Christine Lagarde,” said Jean-David Levitte, a former senior French diplomat was advising president Nicolas Sarkozy at the time.

Even her critics admit she rapidly restored the Fund’s integrity. “After 10 days, DSK was forgotten,” said one IMF insider.

Her most immediate challenges were the eurozone crisis and the resulting multiple national bailouts. Early on she was criticised for siding too easily with German-led austerity policies, given her tight relationships with Ms Merkel and Wolfgang Schäuble, Berlin’s finance minister. But tensions later flared, culminating in the Fund deciding not to participate financially in the third Greek bailout in 2015. 

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Ms Lagarde also faced scepticism for being a lawyer by training and lacking a PhD in economics. Those objections have resurfaced since her nomination to the ECB. 

Critics said although she was a good listener, easy to engage with and less arrogant compared to her predecessors, she could be uncomfortable in disagreements, sitting out tough decisions and forcing staff to forge compromises on their own. 

Some saw this as an asset, suggesting she did not have preset ideological views; others feared it could be problematic if she needed to win others over — a particular challenge for the ECB as it faces hard choices on how to tackle the eurozone slowdown. 

“She’s going to have to advocate for further accommodation against Jens Weidmann [the Bundesbank head], and that’s going to be a really hard argument,” said Erik Jones, a professor in European studies at SAIS-JHU in Bologna. “You can’t bust heads without having the intellectual credibility to do so. She has to have her own voice.” 

Many officials who have worked with Ms Lagarde brushed aside those concerns. 

“She has a hands-on appreciation of how the levers of economic policy work, hands-on contact with central bankers in member countries, and a great sense of macroeconomic and financial sector policy,” said Maurice Obstfeld, who served as chief economist under Ms Lagarde at the IMF.

Speaking to the Financial Times, Ms Lagarde defended her approach, saying she did not know of any organisation that “worked well with a divided house”. 

“People at the IMF are intelligent, rational, and they believe in facts,” she said. “They often come up with a solution that will be satisfactory to the institution and the beneficiary of that advice. [This] does not at all lead to diluted messages or weakened policy recommendations.”

Ms Lagarde was criticised early in her tenure at the IMF for siding too easily with German-led austerity policies, given her tight relationship with Wolfgang Schäuble, Berlin’s finance minister, above © AP

One group of people she had no trouble persuading to make difficult decisions was the IMF’s 24 executive directors. “The board always counted on her to pull it together, to find a way through to consensus, and she did that over and over and over again,” said David Lipton, the Fund’s acting managing director. 

Some say her political savvy might help in arguing for progress in the long-stalled eurozone reform process. “In these times, you don’t need a technocrat, you need something more, and she could bring that to the ECB,” said Andrea Montanino, the former executive director for Italy at the IMF. 

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Part of Ms Lagarde’s IMF legacy comes in the form of its image, which she improved by expanding its work to include the previously overlooked effects of climate change, gender, inequality and corruption on countries’ finances. She argued they were increasingly macroeconomically relevant — and supporters believe she was prescient. 

“I’m leaving an institution that is more open-minded, more focused on people than exclusively on numbers,” Ms Lagarde said. 

Many at the IMF applauded the shift, but there is some lingering resistance; some say that with limited resources, the IMF should not be duplicating activities that could be done by other institutions, and mostly burnished Ms Lagarde’s own personal profile. “It was propaganda in her favour,” said one Fund insider. 

Criticisms of Ms Lagarde’s management style and effectiveness are not widespread, though. “I give her high marks,” said Nancy Birdsall, president emeritus at the Center for Global Development, a Washington think-tank. “ She showed she could learn quickly on the basics, and beyond the basics. She seemed to grasp the big picture instantly on the macroeconomic issues. My guess is . . . that she will show her stuff again [at the ECB].”

Christine Lagarde at the IMF

Euclid Tsakalotos, Greece’s finance minister, observed by Ms Lagarde at a Brussels meeting in July 2015, at the height of the ‘Grexit’ crisis © Reuters

July 2011

Takes the helm of the IMF, replacing Dominique Strauss-Kahn whose tenure was cut short by sexual assault allegations. She is the first woman to hold the position.

August 2011

Ruffles feathers with some eurozone officials by calling for a recapitalisation of weak banks at the Jackson Hole conference at the height of the sovereign debt crisis.

September 2014

Delivers a speech in Tokyo about the importance of economic empowerment for women in a country that was trying to boost female labour market participation.

July 2015

Decides the IMF should not participate financially in an €86bn rescue package for Greece, after coming around to the view that it should only be done if accompanied by debt relief.

June 2018

Steers the IMF to approve a $50bn bailout of Argentina — which would be increased by a further $7bn three months later, and is now in danger of faltering.

October 2018

Warns of the danger of trade and currency wars between the US and China at the IMF and World Bank annual meetings in Bali.

July 2019

Tapped by EU leaders to be the next president of the ECB, succeeding Mario Draghi, who called her an “outstanding choice” for the job. “I’m saying this with the knowledge that comes from having known her for longer than she and I may like to remember,” Mr Draghi said.

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IMF staffers say she is both charismatic and driven, on top of her briefing material, and demanding of their full focus. “If she saw too many people diddling on their cell phones during meetings, she would demand that everyone put them on the table, face down,” said Mr Obstfeld. 

That rigour was on display in her own behaviour too. After her car swerved on the way to Charles de Gaulle airport in Paris last year and she fractured two ribs, she defied doctors to fly to Asia regardless of the pain.

Her ability to nurture close relations with world leaders even during important policy disagreements became well-known. In one example, in 2014 she set out the details of the Ukrainian bailout in a long late-night meeting with Vladimir Putin in Beijing. 

And at a dinner just after her ECB appointment in early July Ms Lagarde was seated next to Donald Trump, who occasionally seeks her out for economic advice, people close to the matter said. Ms Lagarde and Mr Trump spoke about everything from global growth to women’s football and golf.

“I’m a very firm believer that the best way to arrive at agreed solutions — to give life to multilateralism, to include — is to reach out, to find the common denominator, rather than to focus on the differences,” she said. 

However the Argentine bailout — the largest in IMF history — was problematic from the start given its scale and risk. 

After IMF staff reached a deal, some board members felt they had been bounced. “She engineered things very much in the way of a fait accompli, and the board couldn’t decide anything but to go ahead,” said one person familiar with the matter. “That was cavalier on her part.” 

But another person involved in the deal insisted she should not be blamed if the bailout fails: “She did what had to be done. Doing nothing would have been worse.” 

Ms Lagarde herself has no regrets.

“We were the only game in town,” she said. “There was nobody else at the time to invest in the recovery process through which the government had decided to engage, and given the size of the challenge, we had to go big.”

Additional reporting by Victor Mallet in Paris

Via Financial Times

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