IMF Bets on Lagarde as Trump Aims to Upend World Order

  • IMF chief kept board’s full support after French conviction
  • Case raised questions as world debates globalization’s future

El-Erian: IMF Board Is Correct to Support Lagarde

The International Monetary Fund’s executive board caught a glimpse this week of what life might be like in the wilderness of a rapidly shifting world order. It didn’t take them long to slam the door.

Christine Lagarde’s conviction on Monday of negligence in a French court cast uncertainty over her ability to continue as the IMF’s managing director. Within hours of the judgment, in which she escaped any punishment, the fund’s 24-member executive board put to rest any speculation that she might have to resign, praising her “outstanding leadership” and the “wide respect” she commands around the world.

But the episode raises the question of how the IMF would select a leader at a time when traditional alliances are fraying among developed economies and popular opposition is growing to the lopsided benefits of globalization. One of the biggest wild cards would be how the IMF’s role is viewed by U.S. President-elect Donald Trump, who campaigned on a promise to put America’s economy first and look past traditional U.S. allies in Europe toward warmer relations with Russia.

“It’s anybody’s guess who the next occupant of the White House would pick,” said Martin Edwards, an international relations professor at Seton Hall University in New Jersey. “They could pick someone who wants to downsize the organization.”

Since it was conceived in 1944 to help oversee the global monetary system, the IMF has always been led by a European. The World Bank, a sister organization created to finance Europe’s reconstruction after the war, has always been led by an American. It’s a postwar arrangement that emerging markets have started to take umbrage with.

Last Resort

Their missions have since evolved, with the IMF now acting as the world’s lender of last resort and the World Bank bankrolling development from Africa to China. But the leadership pact between the U.S. and Europe has survived, cementing the two institutions as instruments of Western economic power.

A break from that tradition would be a significant development, said George Saravelos, global co-head of currency research at Deutsche Bank AG. The IMF plays a “very material” role in Europe through the institution’s involvement in Greece’s financing plans, he said.

“If the appointment were to move away from Europe, or the Trump administration were to signal a break from that policy, it would raise questions about the role of the IMF in Europe’s crisis-fighting approach,” Saravelos said in an interview.

Emerging markets and developing countries were already chafing against convention five years ago, when Lagarde was first appointed. Officials such as former Brazilian Finance Minister Guido Mantega argued the head of the IMF should be chosen purely on merit. But emerging economies failed to rally behind a single candidate, allowing Lagarde to beat out Mexico’s Agustin Carstens, the central bank governor who plans to leave that role in July 2017 to head the Bank for International Settlements.

Wide Field

If the practice of picking a European is abandoned, the field could be wide open. Potential candidates include former Reserve Bank of India Governor Raghuram Rajan, Credit Suisse Group AG Chief Executive Officer Tidjane Thiam, and Singapore Deputy Prime Minister Tharman Shanmugaratnam. Should he choose to leave his post as governor of the Bank of England, Mark Carney would be a formidable contender. While born in Canada, Carney holds Irish citizenship, which would allow him to make a case as a candidate who breaks -- but doesn’t shatter -- the mold.

A non-traditional managing director would satisfy the desire of emerging markets such as China and India to scale back what they perceive as the West’s outsize influence at the institution. At the same time, it would tilt the delicate balance of power among the IMF’s 189 member nations in ways that are difficult to predict.

Which is why some aren’t ruling out the safest option of all: a third term for the managing director, once Lagarde’s second mandate expires in 2021.

“There might be a desire to just keep her there,” said Seton Hall’s Edwards.

(Corrects by removing the word ‘unprecedented’ in second-to-last paragraph.)
    Before it's here, it's on the Bloomberg Terminal.