Is Christine Lagarde Right for the IMF?

Things were unraveling fast as the council of European finance ministers rushed to Brussels on the afternoon of Sunday, May 9, 2010, to try to rescue the euro. The previous week, global markets had plunged on fears that Greece's sovereign debt crisis could spread to other euro zone countries, exposing already weakened banks to possible defaults. With Asian trading set to open in a few hours, the ministers were under pressure to act quickly to avoid a panic sell-off of Europe's common currency. Then, just as council Chairwoman Elena Salgado of Spain was calling the meeting to order in a cavernous hall buzzing with ministers, aides, and translators, more bad news arrived: Wolfgang Schaeuble of Germany, Europe's biggest economy and a key player in the talks, had fallen ill and been hospitalized. The Germans were sending a replacement, who wouldn't arrive for more than an hour. Christine Lagarde, the French finance minister, called for a recess, then withdrew to a private office down the hall.

If ever there was a moment for Lagarde to show how she might handle a crisis as head of the International Monetary Fund, this was it. For the next several hours, her temporary office became the hub of global negotiations that produced an unprecedented trillion-dollar rescue package for the euro. Seated on a couch, Lagarde juggled dozens of phone calls from government officials, according to an aide who did not wish to be identified. Among them was a conference call with U.S. Treasury Secretary Timothy F. Geithner and other non-European finance ministers. Every 30 minutes or so, Lagarde dialed in to Basel, Switzerland, where European central bankers and IMF Chief Dominique Strauss-Kahn had gathered. When Schaeuble's sub, Interior Minister Thomas de Maizière, landed in Brussels, he came to Lagarde's office to brief her on Germany's position. Others drifted in and out, including Salgado and Olli Rehn, the European Union Commissioner for Monetary Affairs. Occasionally, Lagarde took people aside for one-on-one chats.

By 2 a.m., consensus had formed around a plan to backstop troubled euro zone economies by issuing bonds guaranteed by the 16 euro zone members as well as other EU countries and the IMF. As day broke in Asia, stock and bond markets rose after the ministers released a communiqué detailing the plan. Despite her outward composure during the talks, Lagarde admitted to Bloomberg News later that she had been frightened the euro might collapse. "I felt like, 'Oh my God, it could all go down the tubes.'"

Lagarde's role that night helps explain why she's now the leading candidate for one of the most important jobs in global economic policy. By June 30, the IMF is expected to name a replacement for Strauss-Kahn, who resigned on May 18 to defend himself against charges of sexually assaulting a New York hotel maid. Lagarde appears to be the one to beat, though critics say it's time the IMF named a leader from an emerging-market country. Among those who have expressed interest are Agustin Carstens, Mexico's central bank governor, as well as Trevor Manuel, a former finance minister of South Africa, and Grigoriy Marchenko, the central bank governor of Kazakhstan. So far, none has gained traction, while European leaders have rallied around Lagarde, 55, who announced her candidacy in Paris on May 25. "She has what it takes," British Prime Minister David Cameron said on May 27.

People take note when Lagarde walks into a room. At six feet tall, she's an imposing figure who favors well-cut suits, speaks perfect English, and boasts negotiating skills honed during 24 years as a corporate lawyer, six of them as chairman of Baker & McKenzie, an international law firm, in Chicago. Sometimes she can be glimpsed doing leg lifts and ankle flexes under the conference table, a reminder that she is a former champion synchronized swimmer who stays in shape by doing laps and yoga.

Lagarde has also proved that she can charm audiences beyond ministerial meeting rooms: In 2009 she appeared on Comedy Central's The Daily Show, where she donned a black beret and taught Jon Stewart how to pronounce récession économique catastrophique. Reflecting on her strengths as a negotiator last year, Lagarde said: "I'm not a threat, and I don't have a huge ego. And sometimes I can just break into laughter when something seems so serious and so tense, and I can just say, 'Holy cow, this is not a big deal.'" If she's the clear front-runner for the IMF job—and a welcome relief after the Strauss-Kahn scandal—the question remains whether she's the right person for it.

The IMF itself is under pressure to change. It has always been headed by a European, part of an unwritten agreement with the U.S. that lets the Americans name the president of the World Bank in exchange for leaving the IMF to the Old World. Over the past two years, as the fund has focused increasingly on European economic crises, Brazil, Russia, India, China, and South Africa have increased their financial support for the institution and want a greater share of voting power. Leaders of some countries, including South Africa and Mexico, argue that the next IMF chief should come from a developing economy.

Lagarde has been jetting around the globe in an effort to defuse such complaints. After lunching on salmon and capers with government officials in Brasilia on May 31, she promised to give developing nations more influence within the IMF; on a June 7 trip to India, she said she would consider naming a top deputy from one of them. The Indians weren't convinced, though, and Lagarde left the country without securing their support before she departed for China.

Another critique of Lagarde's candidacy is that the euro rescue deal she brokered didn't work out very well. Greece is still in crisis, with the prospect of default reemerging in recent weeks as ratings agencies have downgraded its sovereign debt. The IMF and European leaders are discussing whether Greece has made enough progress on austerity measures over the past year to deserve more aid. Simon Johnson, who was the IMF's chief economist in 2007 and 2008, says the euro zone leaders just "papered over the cracks" in the currency union, rather than finding a lasting solution such as a two-tiered euro zone in which stronger economies would not step in to prevent weaker ones from defaulting on sovereign debt. Lagarde's point of view, Johnson says, was "'Let's do a full bailout, let's protect the creditors,'" since French banks are among the most exposed to Greek debt. "That's a big conflict of interest."

If she has a broader vision for the IMF—beyond promising that Greek debt restructuring is "off the table" and that emerging markets will get more clout in the institution—Lagarde hasn't revealed it. Her tenure as France's finance minister offers few clues about her thinking, in part because economic policy was typically set by President Nicolas Sarkozy. And while Lagarde was pivotal in negotiating last year's euro rescue, she didn't design it: The idea for the bailout fund came from a Dutch Finance Ministry official named Maarten Verwey. She's not even an economist, although the IMF previously had one noneconomist chief, Ivar Rooth of Sweden, in the 1950s, and has plenty of smart economists to advise her. But even this backstop has its limits. "You cannot ask staff to make decisions for you. It is a hierarchical organization," says Raghuram G. Rajan, who was the IMF's chief economist from 2003 through 2006. "The top is expected to have a point of view."

If she gets the IMF post, Lagarde will be running an institution that is not only changing but changing fast. For decades the IMF dealt mainly with economic emergencies in countries such as Argentina and Turkey, dispensing loans in exchange for painful austerity measures such as cutting government jobs and increasing taxes. But after the financial meltdown of 2008, the 65-year-old institution started getting urgent calls from Europe—initially from the likes of Latvia and Romania, then, last year, from Greece, Ireland, and Portugal. The countries that finance the IMF agreed to triple its budget and assigned it a host of new missions. Strauss-Kahn, himself a former French finance minister, said the IMF would provide about one-third of any bailout money needed in Europe to stem debt contagion—a pledge that some on the institution's board of directors saw as overstepping its role. "The agenda now at the IMF is Western Europe," says Marc Chandler, chief currency strategist at Brown Brothers Harriman in New York. "And it's partly out of their control," because some traditional IMF enforcement tools, such as currency devaluation, can't be used in euro zone countries.

Lagarde has won praise for steering France through the financial crisis, notably by dispensing $48 billion in aid to French banks, which are repaying the money with interest after stabilizing themselves. She also fought successfully to provide corporate tax relief, aid to small businesses, and tax credits to stimulate research. "None of those things would have happened without Christine Lagarde," says Frédéric Gonand, an economics professor at Paris-Dauphine University who recently stepped down after four years as Lagarde's chief economic adviser. "She placed her own mark on economic policy." A May poll by Ipsos for the magazine Le Point put her approval rating at 51 percent, far above her boss Sarkozy's 37 percent.

Still, France has fallen behind Germany in making the kinds of changes that could give the economy a serious boost, such as reducing government bureaucracy and labor market restrictions. The need to carry out policies dictated by Sarkozy has also put her in awkward situations at times. In 2009 she had to defend his plan to invest $51 billion in research and development and other projects at a time when France was under attack by other euro zone countries for running a 7.5 percent budget deficit, far above the 3 percent that member countries had agreed on. And despite her role in negotiating the euro rescue package, the terms of that deal, such as automatic sanctions against aid recipients if they didn't meet agreed-upon targets, were dictated largely by Germany. "France's game seemed to be, 'Let's stick to the Germans as closely as possible,'" says Philip Whyte, a senior research fellow at the London-based Centre for European Reform. "She's a great facilitator and chair, but she's probably not in the absolute center of influence."

Lagarde was raised in the Normandy port city of Le Havre, where her parents were teachers. She received her first exposure to the U.S. in high school when she was an exchange student in the Washington suburbs and interned on Capitol Hill. After returning to Paris, she failed the entrance exam twice for the Ecole Nationale d'Administration, a top finishing school for the French elite, before she enrolled in law school. She then joined the Paris office of Baker & McKenzie. After shuttling between Paris and Chicago for years, in 1999 she became the firm's global managing partner, overseeing more than 3,400 lawyers. She lived full-time in Chicago until 2005.

Few government officials anywhere outside the U.S. share her level of comfort with American culture and business. That was underscored in early May, when Sarkozy put on a digital economy conference in Paris just as Lagarde's name had surfaced as a possible replacement for Strauss-Kahn. Gliding into the conference in a trim black suit, her sculpted cap of white hair set off by a glowing tan, Lagarde was mobbed by French admirers before mounting the dais, where she was warmly greeted by the chief executives of Google (GOOG) and EBay (EBAY). She even figured—sort of—in the recent Home Box Office film Too Big to Fail, in which actress Laila Robins portrays Lagarde blasting then-Treasury Secretary Henry M. Paulson for letting Lehman Brothers collapse. "You allowed it to fail, Hank. It was a horrifying mistake," her character says.

At a Group of 20 finance ministers' meeting in Paris in February, Lagarde was instrumental in bringing China into agreement on a plan to craft an early warning system for trade imbalances and other factors that could jeopardize global stability. China had resisted the idea for fear it would be used to push for revaluation of the yuan. But Lagarde, through the diplomatic serving of tea and macarons, offered concessions to Chinese officials that persuaded them to drop their opposition. "She clearly comes across as a leader," says Clay Lowery, a former Assistant U.S. Treasury Secretary who regularly saw Lagarde in action. "She's very talented and has an ability to work among finance ministers and heads of state." In March 2009 she helped cut short a European finance ministers' debate on reducing value-added taxes by advising the Czech Republic's Miroslav Kalousek, who was chairing the session, to delay the lunch break and shoo all the technical experts out of the room. The ministers soon got hungry and quickly worked out a deal on the issue, which had been under discussion for years.

Even some leaders of developing economies say it would be tough to find a better candidate than Lagarde. "We're in the strange situation of having another European in line for this job, but a European whose personal and professional qualities make her almost impossible to compete with," Russian Deputy Finance Minister Sergei Storchak says. The U.S. hasn't formally endorsed any candidate, but it's unlikely to oppose her.

If chosen, Lagarde would be the first woman to head the IMF, and her talent for low-key consensus building could bring a new style to the institution. She's not a protégé of Strauss-Kahn, who had been expected to run next year as the French Socialist Party presidential candidate against her boss, Sarkozy. Yet a vote for Lagarde is a vote for the IMF to continue what it did under Strauss-Kahn: gradually giving more voting power to emerging markets while pouring lots of aid into Europe. Her standing as the status quo candidate was underscored by German Chancellor Angela Merkel's remark that Lagarde could move "seamlessly" into the IMF post. Assuming she gets it, she might represent the sunset of the longtime transatlantic pact over IMF and World Bank leadership between the Americans and the Europeans. "My sense is," says Chandler of Brown Brothers Harriman, "Lagarde will probably be the last of the European claims on this job."

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