Wrong person for a difficult job

Ideas@TheCentre – The CIS newsletter (Sydney), 27 January 2012

When the International Monetary Fund (IMF) was looking for a new head last year, I wrote in this very forum that French Finance Minister Christine Lagarde was the wrong choice for the job (‘Glamour over substance,’ 17 June 2011). Recent statements coming out of the IMF vindicate my misgivings.

My main problem with Lagarde was that she was too compromised by her French baggage to lead the IMF through the European crisis. I feared that she would not act in the best interests of all IMF members but continue to promote French and/or European policies. This is exactly what we are seeing now.

No other official connected with the European crisis sounds as alarmist as Lagarde. Her gloomy doomsday prophecies make even usually pessimistic commentators like me look cheerful. The IMF’s predictions now regularly warn of imminent economic armageddon and another 1930s-style depression. Where policymakers usually talk the economy up, Lagarde always talks it down – as if she wants to create a self-fulfilling prophecy.

Of course there are good reasons to be concerned about the European crisis – indeed, there are very good reasons. Yet I cannot help but wonder whether Lagarde’s shrill warnings serve a practical purpose: to make the case for even larger emergency mechanisms to bail out European financial institutions and governments.

By painting the European situation in ever darker colours, Lagarde is seeking additional funding for the IMF, thereby increasing her own power. France’s lost AAA rating almost certainly reflects on her personally and her tenure as the country’s finance minister. Her attempts to restore confidence by facilitating an even greater rescue fund make more sense in this context.

However, with every further engagement of the IMF in the troubled Eurozone, the IMF becomes more compromised and less able to provide genuinely independent and impartial advice. As a thought experiment, how would a Mexican or a South Korean IMF director have behaved in Lagarde’s place?

My feeling is that we would have seen none of the emotional dramatisation of events and more cold-headed, sober policy prescriptions. Non-European IMF directors would have been able to assess the European crisis from the outside, unwilling to be drawn into it any more than absolutely unavoidable. They would have guarded the other IMF members’ capital with at least as much concern as the fate of some French banks. And they would not have felt the need to repair their own policy mistakes.

Lagarde was always the wrong choice for the job. The least that countries like Australia should do is vehemently defy her demands for additional contributions to her compromised IMF.