Q&A With Christine Lagarde: Finance's Firefighter Wants to Be Its Architect

With so many financial markets driven by the utterings of central bankers, the words of the woman who is in effect the central banker’s central banker matter enormously. Christine Lagarde, 60, who is about to begin her second five-year term as head of the International Monetary Fund, has a remarkable résumé. She had already run Baker & McKenzie, one of the world’s biggest law firms, and served as France’s finance minister before joining the IMF in 2011. In this interview—conducted at the fund’s headquarters in Washington—the managing director of the world’s lender of last resort discusses the global economy, negative interest rates, banking regulation, her legal problems in France, and even populists such as Donald Trump. While she defends her record, Lagarde admits mistakes, including the overly tough treatment of Greece, and also reflects that politicians start embracing reforms only when the crisis those reforms could have prevented is already upon them. Above all else, she hopes her second term will involve more work on financial architecture and less firefighting, with the IMF focusing more “on preventive measures than on curative actions.” With the euro zone still smoldering and many emerging markets facing difficulties, that may prove a vain hope—but wherever the next fire starts, she’ll soon be at the center of it.

John Micklethwait Should we start on the world economy? You had some gloomy projections at the G-20 in Shanghai, including higher risks of a derailed economic recovery. How much of that deterioration is due to bad luck, or is it just politicians making the wrong choices?

Christine Lagarde I tend to be more positive and optimistic than negative and downbeat. What I think is that if politicians were determined, better coordinated, and took a longer-term view, a lot of what we’re struggling with could be resolved.

So when we say that recovery is at risk of being derailed, or we’re one shock away from a very serious situation, we are also saying, “If you really want to fix it, you can do it.” But it’s not going to come easily from a political point of view. We need to make courageous decisions, which we’ve been talking about for a long time. And that’s one of the frustrations I have, because we’ve been talking about structural reforms, about the legacy of the crisis, about banks having to sort out their balance sheets. And while there is a sense of, “The IMF is right,” it doesn’t get done.

JM How much of that is the world becoming less multilateral? When the crisis broke, the world’s leaders acted together. Now most of the things you just described could be put down to politicians following short-term, very nationalistic positions.

CL I think it’s also the fact that people actually change significantly only when they have their backs against the wall. When we had the G-20 meeting in November 2008, and then the subsequent one in London, people just knew that they had no excuse.

It may take a bit more fragility, drama, and economic misery for things to actually change. And, in a way, I see our duty at the IMF—and my duty—as helping countries prepare for that.

This interview appears in the new issue of Bloomberg Markets. Subscribe now.
Cover artwork: Ryan Melgar

JM In some ways, you need a terrible shock in order to wake them up?

CL That’s often the case. In late 2008 and early 2009, some countries did things they probably wouldn’t have volunteered to do. But they knew that the global economy and the stability of the world was at stake, and it had to be fixed.

JM The paradox of your life is that the only way in which you can get people to do the sort of reforms that might help prevent the next crisis is to go right to the edge of another crisis.

CL Yes, it’s a bit depressing, but that’s the way it works at the moment.

JM You’ve a said recently that governments should avoid overreliance on monetary policy. What are the costs of that overreliance? Is it destabilizing capital flows? Is it asset price distortions? What’s the problem exactly?

CL It’s the risk that monetary policy supports an economy that cannot grow. That’s a waste of resources. What I mean by that is, monetary policy that supports the economy will be effective if we have it in parallel with structural reforms. Wherever possible, fiscal easing can be conducive to more demand and eventually more growth.

So I’m not suggesting that monetary policy is bad. We’re saying that monetary policy needs to continue to support the economy. But to be conducive, the channels have to be unblocked. The banks have to deal with the nonperforming loans, and they have to be agile in providing credit to the economy. Some of them do, but not all of them.

JM Do you think the central banks are running out of ammunition?

CL No, I don’t think so. They have ammunition, but the powder they use can be leveraged more than it is. That’s a very strong message that we want to pass on.

JM Another policy that is very much in vogue is negative interest rates. We all thought it would mean banks would start lending more, but that doesn’t seem to have happened. Do you think we’ve really thought through the unintended consequences?

CL We are currently seeing, not unexpectedly, the weakening of some banks and their business models. I think that’s probably true not only for the banking sector but also for insurance. We are doing more work on the impact of negative interest rates, because it does have broad consequences. And as I’ve been saying, if we hadn’t had negative interest rates, we’d be in a much worse place.

JM When you look around the world, in which countries have politicians not done enough?

CL On structural reforms, I think it’s pretty much across the board.

JM What about the fiscal side? The fund was famous for its fiscal orthodoxy. Now you’re very much on the side of what looks like fiscal stimulus, although sometimes you talk about fiscal space.

CL I talk about fiscal space, not fiscal stimulus, because I think that what was recommended by the IMF in early 2009 was going to a budget deficit of 2 percent—and we certainly are not saying that today. We’re saying there are countries and economies that need to keep consolidating. There are countries with a very high debt level. There are countries—particularly the commodity producers and exporters—that are in a very dire situation and whose business model is going to be completely disrupted.

JM What are examples of that?

CL I was recently in the Middle East, and all the oil-producing countries need some degree of fiscal consolidation. They have to use their reserves where they have them, and they have to completely reconstruct the business model of their economies.

Some of them are doing it. Look at the Emirates, Kuwait, or Saudi Arabia, which is reducing public spending, reorienting its economy in a more growth-friendly way. For those countries, we’re not saying, “Go fiscal.” We’re saying, “Consolidate.”

JM But surely the fiscal orthodoxy of the fund has changed a bit? We used to always think of the fund as a tough guy—or maybe a tough woman.

“We need to make courageous decisions”

CL I think we’re still very much seen as the tough guys in many corners of the world where we are negotiating programs and evaluating progress. 

JM What about the notion of fiscal space? How do you measure that? The fund of an earlier era would have taken a dim view. They would have said, “You always think you’ve got fiscal space until you wake up one morning and it’s gone.”

CL But that’s counterfactual. That’s the issue. While some countries need to consolidate, others have such low borrowing costs that it makes sense for them to take out loans to invest in public infrastructure and education. This will not only boost their own growth but also pull along countries that don’t have the fiscal space. Even in countries where there’s no fiscal space, the composition of fiscal policies should be supportive of growth. We’re not where I would love to see multilateralism go, but we’re certainly having massive interconnections between the economies. Now, some would argue that trade has never been so low relative to growth; therefore, it’s a sign that we’re not in a multilateral world. I challenge that. I don’t agree with it. I think there are flows from intangible services that aren’t necessarily as well-recorded as we’d like, and there are massive flows of capital across the world.

JM I’d like to discuss financial regulation. We’re seven years past the crisis, and yet we’re still discussing the system’s resilience. The agendas are still very much unfinished. Do you think progress on financial reform has been too slow?

CL A lot has been done, although more still needs to be done, particularly with nonbanks. In banks, it’s taken longer than it could have, and I think that’s partly due to the financial-sector players themselves and their reluctance, for instance, to increase capital, particularly to have core Tier 1 capital right from the get-go. And the very time-consuming process about how you define core equity relative to Tier 2, and how different capital instruments fit in the new framework.

JM Do you have a clear blueprint about where we want to end up in terms of capital?

CL I think the FSB [Financial Stability Board] has a clear view that the capital base has to be stronger and bigger, and I think that they’re now getting there. But even if you look at how long it took to define TLAC [total loss-absorbing capacity], which includes debt that could be bailed in, it’s taken ages.

JM Do you worry at all that the levels of capital may be too high? 

CL No, I don’t think so. Resilient financial institutions with sufficient capital are needed to support sustainable economic growth.

JM So basically you know where you want to get to on capital, it’s just a question of putting it into practice?

Photographer: Philip Montgomery

CL Yes, and I think two things need to happen. One is that some of the banks are going to have to completely revisit their business model and operate differently. They must become attractive again to investors, who will have to just stop assuming double-digit returns forever. It cannot continue that way.

And second, the reason I’m saying that the capital has to be strong is because we need to sever the link between the banks and the sovereigns, which has been this implied guarantee that the banks have benefited from. I mean, the whole point of the living will, the resolution system, the deposit guarantees, and all of that is intended precisely to put an end to that implied guarantee. And that job isn’t done yet.

JM Could the finance industry benefit from global consolidation? 

CL I think there has to be consolidation in quite a few countries. The takeover of a German bank by a U.S. bank is not the most urgent priority. But there are countries, especially in the euro zone, where some consolidation is needed.

JM Let’s talk about some personal things. Looking back to when you were younger, did you think it would be possible for a woman to end up doing the sort of jobs you’ve ended up having?

CL I would say probably yes, because I was brought up with brothers by a very independent-minded mother and because I hadn’t faced a lot of discrimination at the time. But it was a shock for me to come to the U.S. in 1973 and go to a girls’ school, which had never happened to me.

JM Another thing I find fascinating about that time is that you—a Frenchwoman—interned in the House Judiciary Committee during the Watergate hearings. I’m interested in your perspective: When you look at America now vs. then, how is the country different?

CL That’s interesting. I was just a baby intern then, but if I’m looking at the relationships on the Hill, it was much more civilized. People talked to each other, and relationships were not exclusively defined by party lines. Bill Cohen, for instance, was a Republican congressman from Maine on the House Judiciary Committee, and he was looking at impeaching a Republican president. I think there was more of that. But it was a time with a lot of scandals as well.

JM Speaking of which, there is something else you know I have to ask about: your French indictment. How long do you expect that ordeal to continue?

CL First of all, I have lodged an appeal against the decision to proceed to trial, which isn’t a decision made on the merits of the case. It’s a procedural decision that’s been made. Legal procedures can be made to last a very long time in some countries. But I will continue to defend it—every inch of it—because I think it’s totally unjustified.

JM Imagine that, for some reason, the IMF hadn’t granted you another five years. What would you have done?

CL Oh, I think I would have taken a three-month holiday to begin with and slept a lot. And then I would have figured what was my next step in life.

JM If I came back in five years, what would you hope had been achieved? How will the fund be different?

CL I think the fund will be different in that it will hopefully be more focused on preventive measures than on curative actions.

JM You want to stop being a fireman or firewoman?

CL Yes, I would rather be the architect—assisting the policymakers to consolidate, strengthen, and prevent crisis, rather than come in with a big hose and trying to extinguish fires. So more prevention, more knowledge-sharing within the institution and with the membership.

JM In order to become that preventive force, do you need more powers than you currently have? You’ve hinted before that maybe there needs to be a change in the multilateral framework to make that happen. Is there a particular thing that would really help?

CL It has taken me four years to get the quota on governance reform of the IMF completed. It’s been an excruciating journey, but we got there. I believe that this institution needs to be strong, well-financed, and provide a global safety net that’s accessible, country-friendly, and yet includes conditions, because we’re lending the international community money.

If there were a mechanism in place that would trigger a sort of automatic increase of the quota, which is the equivalent of the capital, as global GDP increases, or as the portion of countries at risk increases relative to the rest of the economy, I think that mechanism wouldn’t lend itself to political discussions and questioning.

JM And perhaps there wouldn’t be quite as much drama?

CL Then we wouldn’t have to argue and debate and spend hours and hours on that. Just to give you an example, we’re about to have a lengthy debate concerning the adequate size of the institution. Then we will have a lengthy debate about what it means in terms of the next quota increase. Then we will have a lengthy debate in relation to what the quota formula should be, given that one country might go up and another might go down.

But that, in a way, is unnecessary when, if there were an understanding and an acknowledgment that the IMF is actually an efficient global financial safety net, operating with other regional institutions, then there should be just an almost sort of mathematical process by which it either increases or decreases.

JM Do you have adequate lines of financing at the moment? You seem to be saying they’re there, but they’re not necessarily going to last.

CL Well, the quota reform has had one big benefit. It’s given us a sustainable capacity to commit funds. But when I started this job in 2011, I went out on the road to get some bilateral loans, because I thought that we would be credible; it was the very beginning of the European sovereign debt crisis. I thought that the institution should deliver a stronger message and have more ammunition, which we did—we became a $1 trillion institution. We’re at the same position in terms of numbers, but we now have more solid capital.

“I actually don’t think there’s such a thing as the emerging-market economies anymore”

JM What’s the main thing you’ve learned since you arrived at the fund?

CL I’ll use an acronym to answer. By the way, acronyms were what I most hated when I got here; there were so many of them. But we introduced this one to summarize a concept. It’s AIM: agile, integrated, and member-focused. And that really sort of encapsulates what I would like to irrigate the institution with. I think that we all can be more of the three in everything that we do, whether we do surveillance, lending, or capacity-building, which I think we will expand.

JM Europe has been such a dominant theme of your first term. How much of a role do you expect it to play in your second?

CL I think it will probably continue to be difficult.

JM Does that sadden you? If you go back 20 years ago, we were all thinking, Here’s Europe, a wonderfully united thing.

CL Except that when they built it, they decided to go for a currency union in stages and with hiccups along the way. The hope was that would precede a political union and the fiscal union, which would naturally come about as a result. And it didn’t, which was, I think, an architectural mistake that needs to be remedied. But when you try to fix the building after it’s been dilapidated, it’s a bit more difficult.

At the IMF, we would like to see the euro zone be much more integrated, which would leverage its balance sheets on a nonsovereign, nonnational basis with a view of helping the entire zone.

JM And for Europe to finally become a proper single market?

CL Yes, which would be a fiscal union, a banking union, and an economic union.

JM Do you still buy the European dream in that sense?

CL I hope it will continue to mature into more of a dream than a nightmare.

JM Is there any sense in which Europe is working at the moment?

CL It has worked better! You know, at the same time, just like what we were discussing about the economy, it’s usually when something goes through a massive crisis—an existential one—that eventually it bounces out of it and onto a new plateau.

Also, the euro zone has been quite successful from a currency perspective and for the movement of trade, of goods and services, which is important. When you look at the private-sector level, they have been relying on that euro zone being a real market.

JM And if it’s not, terrible trouble follows?

CL Well, if it were to disintegrate, something new and different will come out of it. But like any uncertainty, it’s going to have a cost.

Now will that happen? Or, for instance, will a positive outcome of the Brexit referendum to stay in the union strengthen the determination to actually be more efficient, more productive, more focused on delivering value for the European citizens? That would be the positive outcome. 

JM If you think about when you arrived at the IMF, we’re again in a situation where America is still the big driving force of the world economy, Europe is doing less well, banks are still pretty big. Do you feel that not much has really changed?

CL Well, China has been a major change since 2011. It’s either the largest or second-largest economy in the world, depending on how you calculate it. And compared with 2011, I think the emerging-market economies were thriving then. They were producing something like 80 percent of the world’s growth at the time.

JM How worried about emerging economies are you now?

CL I think what has happened is that you have this group of countries—they were called the BRICs—and it’s as if they’ve all gone in different directions. You have India thriving, much more so than in 2011, with a leader [Narendra Modi] who’s determined to conduct change and to deal with his Indian Parliament, which is not always easy, I’m sure. And then at the other end of the spectrum you have Brazil, which is struggling with the commodity crisis, political uncertainty, inefficiencies, corruption.

JM Some of these emerging economies had a fantastic ride with commodities. Do you think they wasted the time that the boom gave them?

CL I actually don’t think there’s such a thing as the emerging-market economies anymore, which is quite an interesting phenomenon. And not all of them, no. If I look at the signs of hope on the horizon, I think of Latin America. Colombia, for instance, is heading towards a peace process that will hopefully be completed soon. Argentina is coming back into the fold and saying, “Argentina is back.”

Photographer: Philip Montgomery

JM Although that has occasionally happened before over the past 100 years.

CL Yes, 100 years—but not in the past 20 years, right? So that’s a positive. And if you look at countries like Peru, Chile, Mexico—yes, they have faced a big commodity crisis, but they have adjusted to it. When you see how they tolerated, it hasn’t been great, but they’ve been strong enough to adjust to changing circumstances.

JM So what do you think was your biggest mistake or failure over your first five years?

CL I have one big frustration, and I don’t know how to fix it actually. It’s still with me. The IMF’s survey results show that our image has improved, that the fund’s reputation as a hard, fiscal-only player has completely changed. When we ask members for feedback, we hear, “Yes, much better.” “Yes, the more human side of the IMF is there.” Somebody said to me, “You are giving a heart to an institution that did not have one.”

So all of that’s good. That is what I want to continue doing. But despite that, whenever a country is getting close to the line, and we are saying confidentially, “You should ask for a program, we can help you,” there’s still some reluctance and concern about the stigma that is associated with a country asking for IMF support.

JM And where haven’t you received enough credit?

CL I’m proud to have strengthened the institution. And if you want one very specific, topical example: Ebola. The way in which the institution shortcut the procedures and rushed to a solution, the way the fund’s executive board came out unanimously with a single set of views among the 188 countries to support Guinea, Liberia, and Sierra Leone, that was for me a superb moment.

“Greece cannot just continuously tag along and expect that things will be sorted out”

JM Let’s talk about Greece. What mistakes were made by you and by the IMF?

CL We have acknowledged one mistake, which had to do with the fiscal multipliers where we—all of us, the IMF, Europeans, the ECB [European Central Bank]—underestimated the contracting impact of some of the measures that we recommended. We overestimated the ability of Greece to actually endorse and take ownership of measures that were needed, because we moved from one government to another to another to another, and it was always, “It’s not really our program, it’s not really our reforms, it’s not really our measures. It’s imposed by the Troika putting all members in the same bag.” So I think that was overestimated.

JM Where were the negotiations especially difficult for you?

CL You know, our job was to lend international money from the overall community—including from very low-income countries, even from poor euro area members—to a country that had to conduct reforms and that had misrepresented its numbers. Somebody representing the international community had the duty to say, “This is wrong. This needs to be done. This needs to be changed.” And this is an ongoing process. I see it as our duty here at the IMF to not be complacent, to assess the reality of numbers, the reality of reforms, to measure the potential output of those reforms, and to reestablish the credibility and the economic sovereignty of that country. Greece cannot just continuously tag along and expect that things will be sorted out. The Greek leaders will need to take more ownership of reestablishing their country.

JM Do you expect Greece to stay in the EU?

CL Yes, I think so. We’re not out of the Greek situation yet. And I think the present circumstances with the migration and the refugees are going to strengthen the critical role Greece is playing in the EU.

JM I wonder how the surge in populism has played a role in changing either your own personal calculations about how to deal with the euro mess, or for that matter the fund’s. Was that unexpected, and what were the consequences?

CL I think it has played a bigger role with the governments in the euro zone than it has for us. We do not play a political role, and we cannot get involved in political discussions and prognostics of which group or party will win. We have to acknowledge what’s going on, and we have to be aware of populism. But it was a big factor for the decision-making process of the European leaders.

JM You’re being charmingly technocratic.

CL That’s my job, John. I’m no longer a politician.

JM When you look at populism, especially here in America with Donald Trump, what do you think? Is there a repetition of what you’ve seen with Marine Le Pen, Silvio Berlusconi, and people like that in Europe?

CL I see the same frustration or exasperation with what people regard as a sort of disconnected elite and a lack of touch and concern by politicians with their day-to-day concerns, worries, life. I think that they’re very much using that as leverage.

JM Do you worry that the kind of globalization, the multilateralism you’ve spoken about, could be undone by the fires of nationalism—the ones John Maynard Keynes once called the “serpent to this paradise”?

CL Yes, it could. I think that multilateralism—that ability to move around, to draw on and leverage the diversity of the world—is a very, very precious good that we have to cherish, secure, and maintain.

Micklethwait is the editor-in-chief of Bloomberg.