Don’t turn new IMF head into the next Hank Paulson
Share
During the US banking crisis, the head of the US Treasury, Hank Paulson, was also the former chairman and chief executive of the country’s largest investment bank.
The IMF would repeat this disastrous conflict of interest by replacing Dominique Strauss-Kahn, its outgoing managing director, with Christine Lagarde, the French finance minister and current frontrunner for the role.
In case anyone still thinks the IMF is still a mere handmaid to the world’s key economies, consider the facts.
First, if nations were able to bail each other out efficiently without a gigantic IMF bureaucracy in Washington, they would.
The disagreements over the eurozone government debt crisis have proved they are incapable of achieving this even within a single politically unified continent, let alone within a disparate continent or globe.
“Appointing Lagarde would violate both of the IMF’s key virtues”
The US and then the global financial crisis primarily concerned banks, but has now spread to governments as well. As the developed world is broke and Asia continues to amass domestic reserves, the IMF is the only potential leader in the sovereign debt crisis.
Second, the IMF may receive its funding from the world’s governments, but its decisions are independent. If it was unduly influenced by the US administration and its expansive spending policy, for instance, it would never have agreed to sharp spending cuts in Europe.
Appointing Lagarde would violate both of the IMF’s key virtues.
First, Lagarde is already a key player in Europe’s internal negotiations over the debt crisis, which have been a mess from the start.
Second, as a European finance minister and defender of the eurozone status quo, she is hardly an impartial observer.
Again, consider the facts. As a French minister in the 1990s, Strauss-Kahn was one of the key architects of the euro. As the head of the IMF, he had every interest in directing as much IMF money as possible to the eurozone, until the eurozone approved a full financial union and supplied the money itself.
Unsurprisingly, he has got his way on the loan. The results, however, have been chaotic. Few eurozone voters want a financial union, beyond a vocal cadre of politicians, theorists and pundits.
As a result, eurozone politicians, including Lagarde, have reached an untenable compromise. They will enable a bailout of eurozone states, a bridging loan until a political consensus emerges. But they will supply only a small proportion of the bailout money themselves. Instead, they use the European Financial Stability Facility to guarantee loans from international sources, predominantly Asian sovereign wealth funds.
If Lagarde gets the IMF job, she will most likely use it to accelerate loans from international sources, without the eurozone having to guarantee any of the money.
At a time when other, poorer parts of the world remain in financial turmoil, the merits of this approach seem highly questionable.
Emerging markets, for instance, provide a key source of funding and are likely to object to eurozone interests hijacking the IMF.
After decades of Europeans taking the top job at the fund, it is only right that the international community insists on selecting a new incumbent on their merits.
However, having no conflicts of interest should be considered one of the key merits in an appointment of this type.
Even if flooding Europe with IMF money is the right decision, it looks terrible if former European ministers are making it.
To receive more relevant articles like this one, why not sign up to our briefings and breaking alerts by clicking here and Follow @fundweb
