Lagarde Saving Europe Proves Being First Isn't What's Electable
Christine Lagarde, France’s finance minister, was at her Normandy weekend home on Saturday, May 8, juggling calls from President Nicolas Sarkozy, German finance chief Wolfgang Schaeuble and Dominique Strauss-Kahn, the Frenchman atop the International Monetary Fund, Bloomberg Markets reports in its August issue.
The euro was plunging, the Euro Stoxx 50 index had dropped 11 percent since May 1 and concern was rising that Greece and other southern European nations would default on their debt. U.S. Treasury Secretary Timothy F. Geithner, in a Friday conference call with Group of Seven officials, had been clear: Investors wanted action.
On Sunday, the finance ministers of the 27 European Union nations gathered at the EU’s Brussels headquarters, where it was Lagarde, according to a person who was there, who shepherded a broad agreement to reinforce the finances of the EU, with its half-billion people and combined gross domestic product of $15 trillion.
At 3 a.m. Brussels time on Monday, as Asian markets began trading, the EU announced a rescue package valued at 750 billion euros or, at the exchange rate that day, almost $1 trillion.
“The only thing the markets understand is money,” Lagarde, 54, said in an interview 10 days later. “We had to get real, which meant get big. If you don’t have a big number on the board, they’ll think you are really just a bunch of amateurs.”
The $1 trillion weekend was the next step in the struggle to revamp Europe’s economy -- and perhaps save the single currency -- by shoring up debt markets, slashing budget deficits and overhauling a banking system reeling both from the current crisis and the 2008 credit squeeze.
The challenge now is for Germany and France, the pillars of the 16-nation euro zone, to show they have control of their own budgets by following through on tens of billions of euros in promised spending cuts and tax increases.
The May 10 agreement created a fund that can make direct loans to any member of the euro club in need. Commitments include 259 billion euros in guarantees from France and Germany and another 250 billion euros in possible loans from the IMF.
The European Central Bank for the first time said it would begin purchasing euro-zone government bonds. As of June 21, it had bought debt worth 51 billion euros.
Investors Not Convinced
The rescue package didn’t convince investors that the risk of sovereign-debt default had ended. Stocks worldwide continued to fall. As of yesterday, markets had lost $2 trillion for the year, according to data compiled by Bloomberg. The euro remained near its four-year low.
“The crisis is far from over,” George Soros, the billionaire investor, told a finance conference in Vienna on June 10. “Indeed, we have just entered Act II of the drama.”
Lagarde, after dozens of meetings on Europe’s panic, has emerged as a calm presence amid the uproar.
“She’s a woman who is respected by everybody, including in the Anglo-Saxon world and in Germany,” says Stephane Richard, chief executive officer of France Telecom SA, who worked as chief of staff in Lagarde’s finance department for two years until June 2009. “And the French like her because she represents them well.”
Lagarde says if she and her colleagues had failed to demonstrate that Europe, united, would support its weakest members, the situation would have put the euro under severe stress.
Eye of the Storm
The 12-hour talks in Brussels, including backroom discussions Lagarde held with leaders of Spain and Germany and a midnight conference call of G-7 finance ministers and central bankers, felt like being in the eye of a tornado, Lagarde recalls.
“You don’t feel the strength of the winds,” she says. “You just have to resolve it.”
She is speaking in her office in an 18th-century mansion located steps from France’s National Assembly. She’s silver- haired, 6 feet (183 centimeters) tall and -- unlike most French officials -- as comfortable speaking in English as in French. The room has 15-foot ceilings and gold-painted moldings around windows that look past a formal garden to the River Seine.
Lagarde has a second office at Bercy, a massive modern block built for the Finance Ministry in 1986. She sometimes travels between the two in a small, gray powerboat, past Notre Dame Cathedral and the Musee du Louvre.
Appointed by Sarkozy in 2007, Lagarde is the first and only woman finance chief in the G-7 -- the U.S., Canada, Japan and the biggest European nations. It’s a position she’s accustomed to: From 1999 to 2005, Lagarde was the first female chairman of Chicago-based Baker & McKenzie LLP, the world’s fifth biggest law firm by revenue last year.
“She’s truly open to the rest of the world in a way that’s exceptional,” Richard says.
Lagarde’s ability to bridge disparate power blocs is crucial for Europe as the global financial crisis stretches into a fourth year, says Louis Giscard d’Estaing, a lawmaker for the ruling Union for a Popular Movement and son of former French president Valery Giscard d’Estaing.
“In Europe, among her peers, and in global forums such as the G-20, she’s the right person at the right time,” he says.
With the value of the euro dropping precipitously -- it fell 14 percent to $1.23 per euro this year through yesterday -- the priority for members of the euro zone is to cast aside past differences and coordinate their response.
Merkel insists that Europe’s financial woes can’t be cured until the entire region curtails its spending and raises taxes to move budgets closer to the EU target: deficits that are no more than 3 percent of gross domestic product. She set the example, announcing in early June that Germany would adopt an austerity package that includes up to 15,000 public-sector job cuts and a financial transactions tax.
The French around the same time imposed a three-year spending freeze and pledged to reduce France’s deficit to 3 percent of gross domestic product by 2013. France’s debt load of 77.6 percent of GDP last year was the fourth largest in the currency union, after Italy, Greece and Belgium, according to European Commission data. As of mid-June, it was still less than that of the U.S., which was 85 percent for 2009.
The commission predicts that France will have a deficit of 8 percent of GDP this year, the fifth largest among the euro countries.
G-2 of Europe
“People talk about the U.S. and China being the G-2,” says Jean-Francois Cope, head of the parliamentary group of Sarkozy’s UMP. “Well, France and Germany are the G-2 of Europe. Germany has made great strides in terms of its budget in recent years. France hasn’t. Now is the time to show we understand rigor as we set out the spending plans for 2011 to 2013 in a very explicit way.”
It was in this spirit that Sarkozy’s government on June 16 said it would raise the minimum retirement age to 62 from 60 and the top income tax rate to 41 percent. Even before the plan was announced, the Force Ouvriere union held protests, saying any change would be unfair and would fail to make allowances for the hardships faced by manual laborers.
Investors are demanding that Sarkozy’s economic team live up to its promises. The premium on France’s 10-year government bonds over similar German bonds doubled in the first eight days of June to 55.6 basis points. It dropped back to 34 points yesterday, though it remains higher than its average for the past year.
“They really need to deliver,” says Gilles Moec, an economist at Deutsche Bank AG in London. “They need to be much bolder than they have been so far. If it stays rhetoric, it won’t do.”
Lagarde says she’s in favor of both cutting deficits and driving growth.
“We can be stable forever and crippled forever as well,” she says. “We need to work on all engines -- which means exports, investment and consumption.”
France Telecom’s Richard says Lagarde herself hasn’t been assertive enough.
“She doesn’t use all of the assets--and the image she has-- to weigh in a bit more on political debates in France on certain subjects, taxation, for example,” he says.
Sacrifice is proving a hard sell all over Europe. In Greece, where the public debt stands at 115 percent of GDP -- it’s 78.7 percent EU-wide -- workers have filled the streets protesting an austerity plan that would, among other things, boost the retirement age to 65 starting in 2013.
In Spain, where unemployment is about 20 percent, the Socialist government led by Prime Minister Jose Luis Rodriguez Zapatero passed spending cuts on May 27 by just one vote. Spain lost its top grade from Fitch Ratings the following day. In mid- June, Spain’s public-sector unions were planning a general strike to protest the measures.
As she wrestles with Europe’s sovereign-debt emergency, Lagarde is also a leader in the effort to deal with the region’s financial institutions, which are newly threatened as Greece and other countries teeter on the edge of default. Banks in Germany and France alone have a combined exposure of $124 billion to Greece and $777 billion more to Ireland, Portugal and Spain, according to an estimate by the Basel, Switzerland-based Bank for International Settlements.
Lagarde wants to clamp down on bankers’ bonuses, limit conflicts of interest at rating companies, and move derivatives trading from the over-the-counter market to exchanges.
Derivatives are securities whose value is derived from stocks, bonds, currencies or commodities.
G-20 in 2011
As France prepares to take the helm of the G-20 in January, Lagarde is pressing the U.S.’s Geithner to tweak plans to raise capital requirements for banks under the aegis of the Basel Committee on Banking Supervision, which is deliberating on new, more stringent bank regulations. Lagarde has told Geithner that France wants any new capital requirements timed so that they don’t choke off growth in Europe, where companies rely more on bank financing than do their U.S. counterparts.
Sarkozy, meanwhile, is also pressing for the EU to impose new rules on hedge funds. Those based in Europe would need a seal of approval from a regional regulator. Others would require individual registration in each European country they wish to operate in. Geithner wrote to Lagarde in April opposing the plan, saying it risks deterring U.S. funds from entering the European market.
At home, even opponents of Sarkozy’s business-friendly UMP government acknowledge Lagarde’s effectiveness.
Luck for France
“It’s been great luck for France -- and for Europe -- to have her in that job right now,” says Jean-Pierre Balligand, a Socialist lawmaker who sits on the Finance Committee of the National Assembly. “In a crisis, Europe is isolated, and she has proved able to overcome that. It’s because she doesn’t have that immodest side that the French sometimes have, the idea that we know better.”
Lagarde was born Christine Lallouette on Jan. 1, 1956, in Paris and later moved to Le Havre, a city of about 180,000 on France’s Atlantic coast. Her father, an English professor, died when she was a teenager. Her mother, who taught Latin and Greek, and her grandmother took care of the household, including Lagarde’s three younger brothers.
An avid swimmer, young Christine was selected for the French national synchronized-swim team when she was 15 and competed internationally for two years. She still swims several times a week and goes scuba diving in the Mediterranean with her partner, a Corsican businessman named Xavier Giocanti, who lives in Marseille.
Bethesda High School
She has two sons from a previous marriage, now ages 22 and 24.
At 17, Lagarde attended a year of high school as an exchange student at Holton Arms, a private girls school in Bethesda, Maryland. She was already interested in politics, she says, and, in 1974, landed an internship in nearby Washington with the staff of William Cohen, a Republican congressman from Maine. He needed her to answer letters from his French-speaking constituents.
Cohen later became a senator and served as President Bill Clinton’s secretary of defense from 1997 to 2001.
Lagarde returned to France to study law at the University of Paris, Nanterre, and later earned master’s degrees in English and labor law. In 1981, at age 25, she joined Baker & McKenzie’s Paris office, launching a legal career focused on employment law and mergers and acquisitions.
Baker & McKenzie was the highest-grossing law firm in the U.S. in 2009, with $2.1 billion in revenue, according to American Lawyer magazine.
In 1987, Lagarde became partner and, eight years later, was selected as one of two European representatives on the firm’s seven-member executive committee. In 1999, at 43, she was elected by the law firm’s partners as chairman.
“The big surprise was that Baker & McKenzie chose not just a woman, but a French one,” says Denise Broussal, the Paris office’s managing director from 2004 to 2008, who worked with Lagarde for more than a decade.
“Christine gave tremendous visibility to Baker & McKenzie, which we didn’t have before,” Broussal says. “It was good for business. To a certain extent, it’s what she’s doing for France now.”
As a lawyer, Lagarde was known for her stamina; she never seemed to need much food or sleep, Broussal says. She was also a master negotiator in complicated cases.
Destabilizes Opposite Party
“She destabilizes the opposite party,” Broussal says. “If someone is being very aggressive, she just stays very calm, very polite, and then she’ll get her way in the end.”
Lagarde moved to Chicago when she took over the law firm. She traveled extensively among Baker & McKenzie’s global offices, staying whenever she could in hotels with swimming pools to get her morning exercise.
In 2005, Lagarde got a call from then-Prime Minister Dominique de Villepin asking her to join the French government. He gave her one hour to make up her mind. She accepted, and boarded a plane for Paris that day, she recalls.
As trade minister from 2005 to April 2007, she pressed France’s case that the strengthening euro was suffocating the region’s exporters. After one month as agriculture minister in May that year, she was named to the finance post in a cabinet shuffle that moved her predecessor, Jean-Louis Borloo, to the environment ministry.
Lagarde is one of 13 women, including the ministers of higher education, justice and health, in Sarkozy’s 40-member cabinet.
Lagarde isn’t elected, and her transition to the political spotlight was somewhat rocky. Early on, she was pilloried in the press for saying she’d found the French less interested in work when she returned from living in the U.S.
“They were more interested in chatting about their holidays, about their long weekends,” she told the Sunday Times of London in September 2007. “Doing nothing was very much the mantra, and work was disregarded.”
Lagarde attributed the attitude to the effects of the 35- hour-workweek rules that took hold in 2000. Since then, Sarkozy and Lagarde have eased limits on overtime work in France.
In 2007, as oil prices surged, Lagarde suggested that people get around on bicycles. Critics led by Socialist lawmaker Francois Hollande labeled her “Marie Antoinette,” the queen famous for saying the starving masses should eat brioche if they didn’t have bread.
With investor scrutiny of public debt rising and with Germany demanding balanced budgets, it’s up to Lagarde to press her boss to go further faster, even if it hurts politically. She and Sarkozy, who faces an election in 2012, have promised to pare France’s budget shortfall to 6 percent of GDP next year from 8 percent in 2010.
The retirement age and income tax increases announced in June would only make up a fraction of the deficit.
When Lagarde visits the U.S., she’s more visible than a typical French minister, helped by her fluency in English and her understanding of U.S. business and culture. And her U.S. sojourns haven’t been all about economic gloom.
In April 2009, she showed up on the Comedy Central TV channel’s Daily Show, a satirical send-up of the news hosted by Jon Stewart. In a dark suit and white shirt, she walked onto the set carrying a large red handbag and cheerfully responded while Stewart asked questions about her role in solving the globe’s financial woes, including whether she had jurisdiction to fire U.S. bankers.
She translated the phrase “catastrophic economic downturn” into French for him: recession economique catastrophique.
“That’s beautiful,” Stewart said. “If this depression were happening in French, I don’t think we’d be nearly as panicked about it.”
As their chat wound down, Lagarde opened her bag and pulled out black berets, which the two donned while Stewart jumped around shouting, “Vive La France!”
Lagarde and her G-7 peers formally meet several times a year. In February, Canada hosted the group in Iqaluit, a town near the Arctic Circle where the average winter temperature is minus 30 degrees Celsius (minus 22 degrees Fahrenheit). Six ministers wore their new Canada Goose-brand down parkas; Lagarde wore a long mink coat.
She stayed after the meeting to go dog sledding with her Inuit hosts.
The finance minister finds that, as a woman in the worlds of law and finance, she can move the discussion along.
Women and Men
“In negotiations, I think women tend to intimidate men because, you know, we are not exactly the same,” she says. “But I am not a threat, and I don’t have a huge ego. I think I can help broker deals and reach consensus.”
That job has become more important as economic differences among the euro-zone countries threaten to drive the members of the currency union apart. For Lagarde, it’s a question of political will.
“It’s a turning point now,” she says. “The most difficult component is to decide how our economic policies are going to converge -- not coordinate, but converge.”
The basic issue is one that European leaders have struggled with ever since French Foreign Minister Robert Schuman proposed that European states form a “supranational” organization in 1950: At what point does cooperation between countries go so far that elected national governments lose control of their destinies? As Lagarde and her counterparts struggle to resolve the crisis, those national divisions are more stark than ever.