Christine Lagarde took over the top spot at the International Monetary Fund eight years ago in the midst of two crises. The first was an internal crisis of leadership: Her predecessor, Dominique Strauss-Khan, had just been forced to step down amid sexual assault allegations, only four years into his tenure.
The second crisis was external: Europe’s economy was reeling after an initial bailout of Greece hadn’t resolved its debt crisis and political tensions between Athens and Brussels threatened to upend any future deal.
Now, Lagarde is leaving the fund to become the likely next chair of the European Central Bank. Thanks to Lagarde’s leadership, her successor will inherit a stronger institution and far less tumultuous conditions.
Yet her tenure in Washington was not without controversy. She also leaves her replacement with some major challenges, including preparing for the next financial crisis and keeping the peace between the IMF’s two most important member states.
It is easy to forget how fraught the political and economic situation was in Europe when Lagarde took charge at the IMF. It was still fashionable to question whether the common currency would survive.
Today, while scars are still evident, the most pessimistic predictions have largely faded. At least some of the credit for this lies with Lagarde, though it would be wrong to suggest her handling of the crisis was above reproach.
For Lagarde’s strongest critics, her biggest failure was allowing the IMF to go along with Germany’s demands that Greek rescue funds come with strict austerity measures attached.
The measures have not aged well, as even traditionally liberal economic organizations like the Institute of International Finance have questioned their efficacy in hindsight.
Lagarde fueled some of this criticism with inartful public statements. In one, she suggested that she had little sympathy for the Greek people’s plight. In another, she complained about Greek tax evaders.
Despite these characterizations, it is also true that under Lagarde’s tenure, the IMF began to publicly question the effectiveness of the harsh cuts imposed on Athens, an admission that was hardly trivial.
In addition, as the crisis dragged on, the IMF’s viewpoint notably shifted. By the time the third Greek rescue package was negotiated in 2015, the IMF had staked out a firm position, refusing to participate unless the deal resulted in significant debt relief for Greece, against Germany’s wishes.
Without IMF pressure on this point, the terms of the deal would almost certainly have been more onerous, if not draconian, perhaps further delaying Greece’s economic recovery.
The outgoing managing director also presided over a successful, though long delayed, voting and quota reform at the IMF that rebalanced political voices within the fund and increased its lendable resources to fight future financial unrest.
This effort was part of the deal that the IMF made with emerging market governments that provided it with additional, but temporary, resources in the aftermath of the global financial crisis and the ensuing debt crisis in Europe.
In exchange, the IMF promised to reweight its voting structure to better reflect the economic heft of countries like China, India, South Korea, Russia and Brazil.
Though the IMF approved the changes before Lagarde began her tenure, the measures could not be made official without approval from the U.S. Congress. Lagarde, a strong advocate for the reforms, publicly pressured American lawmakers to follow through, which they eventually did in 2015.
Lagarde also worked to further vest China in the IMF and its overall mission. Indeed, this was a significant part of her push for the voting and quota reform, which significantly elevated China’s stature in the IMF, effectively doubling its voting share. China became the IMF’s third-largest shareholder, behind only the U.S. and Japan.
In 2015, Lagarde came out in support of including China’s currency, the yuan, in the very short list of elite global reserve currencies—what is known as the IMF’s Special Drawing Rights basket. The move was something that economic reformers in China had been pursuing for years.
Inclusion would effectively legitimize the yuan as an international currency, conferring status on Beijing both within and outside of the IMF.
The public support from the head of the fund likely helped push Washington to give up an effort to block the move. Ultimately, the vote for inclusion succeeded in a win for both China and those who wanted to give Beijing a greater stake in the IMF.
These are all significant achievements, but Lagarde still leaves a number of unresolved challenges to her as yet unchosen successor. First and foremost is the growing tension between the U.S. and China.
As China has increased its development lending in recent years as part of its expansive Belt and Road Initiative, building ports, bridges, tunnels and other infrastructure across Eurasia, concerns about bad Chinese debt and the potential for debt crises have grown. The U.S. has taken a strong position against lending IMF resources to countries that would use the money to pay back Beijing.
This issue is not going away and will remain a point of contention that the next head of the IMF will have to grapple with.
Making matters worse, the Trump administration this month further escalated its trade war with China, formally declaring it a currency manipulator. The move directly involved the IMF in the economic row as the U.S. Treasury formally requested that the fund weigh in on Beijing’s currency practices.
Ultimately, the IMF sided with China, stating there is little evidence of the kind of currency intervention the Trump administration alleges.
While this is not the first time the IMF has sided against the U.S., the decision is likely to frustrate a White House already suspicious of international institutions.
This tension could further complicate the IMF’s ability to garner American support for renewed efforts to increase its permanent reserves—efforts Lagarde has been pushing but that so far the U.S. has resisted. Ultimately, failure to secure these resources could limit the IMF’s ability to deal with the next global financial crisis.
Of course, these issues are not for Lagarde to solve anymore. She can leave knowing that both the IMF and the world economy are in better shape than when she found them in 2011.
Source: World Politics Review
