Analysis: Lagarde would change style, not substance at IMF

PARIS Wed May 25, 2011 6:07am EDT

France's Finance Minister Christine Lagarde announces her candidacy to head the IMF during a press conference in Paris, May 25, 2011. REUTERS/Jacky Naegelen

France's Finance Minister Christine Lagarde announces her candidacy to head the IMF during a press conference in Paris, May 25, 2011.

Credit: Reuters/Jacky Naegelen

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PARIS (Reuters) - An effective negotiator but no economic visionary, French finance minister Christine Lagarde would bring a change of style, not substance to the IMF and be unlikely to push for radical solutions to Europe's debt crisis.

A labor and anti-trust lawyer by training, Lagarde lacks the academic pedigree, including a doctorate in economics, which helped former International Monetary Fund chief Dominique Strauss-Kahn win the respect of European leaders and IMF staff.

But the charismatic 55-year-old, who on Wednesday announced her candidacy to succeed Strauss-Kahn after he resigned last week, has gained on-the-job experience of the challenges facing the IMF during France's G20 presidency and the euro zone crisis.

She has won a reputation for brokering deals under pressure, overcoming Chinese resistance to the use by G20 governments of indicators to measure global economic imbalances, and allaying German fears over the creation of a euro zone bailout mechanism.

As an official who helped to put together last year's 110 billion euro ($155 billion) bailout of Greece by Europe and the IMF, Lagarde could be expected to maintain the Fund's financial support of Athens while pushing it for privatizations and more spending cuts. She would almost certainly seek to avoid more drastic solutions such as a forced restructuring of Greek debt.

And at a time when the IMF has been seeking to move beyond the "Washington consensus" -- heavily market-oriented policies resented by some emerging economies -- Lagarde would bring a French vision of the importance of social spending, plus her desire for a "multipolar" world in which China and other developing nations played a greater role.

"Lagarde would be very much in the continuity of what Strauss-Kahn did," said Gilles Moec, senior European economist with Deutsche Bank.

"What's interesting is that she would bring those French values, which are probably what's needed, but also an understanding of the Anglo-Saxon approach."

CRITICS

Lagarde appears to have enough support in Europe, the United States and China to handily defeat any potential challengers to head the IMF.

Critics say she is an economic lightweight who has not distinguished herself with any landmark legislation during four years at the finance ministry; in this period, much economic policy has been dictated from the Elysee presidential palace.

But the former attorney, who rose to become the first female chairman of Chicago-based law firm Baker & McKenzie, has fought hard to promote her positions. She has earned a reputation as the most uncompromising opponent of a Greek debt restructuring among euro zone ministers.

"You can't stroke an elephant a little bit," Lagarde warned euro zone ministers in February, expressing fears of market turmoil if Greece were allowed to default.

Beneath her Chanel jackets and stylish shock of silver hair, the former synchronized swimming champion has a strong political sense, say those who have met her.

"She's thoroughly familiar with all the substantive issues and she's a great negotiator with good political instincts," said DeAnne Julius, head of the Chatham House think-tank.

With European nations rallying behind Lagarde, the main obstacle to her nomination could be a possible judicial probe into her role in awarding a friend of French President Nicolas Sarkozy a 285 million euro payout to settle a legal dispute.

Judges are to rule on June 10 -- the deadline to submit IMF nominations -- on whether to launch an inquiry.

Although developing states have been pushing for an end to the tradition by which Europe has the final say in choosing the IMF head, Europeans say it is crucial for them to retain their 65-year grip on the Fund while it is involved in Greece, Portugal and Ireland.

Lagarde's effectiveness as head of IMF could hinge on the manner in which this issue is resolved. Any sense of a backroom deal between the United States and Europe to choose her could leave a legacy of bitterness that would undermine her.

She herself has called for a transparent selection process and French officials say she has the backing of China, the IMF's third-largest shareholder, which appreciated her sensitive handling of controversy over the yuan's exchange rate at G20 meetings.

"To jaw-jaw is always better than to war-war," has been Lagarde's favorite phrase during France's G20 presidency, quoting Winston Churchill, and her negotiating skills may be important to rebuild bridges with emerging powers.

But given the risk of Greece becoming the first western European state to default in six decades, some economists say a European may not be the best choice to tackle the crisis.

"To really solve the EMU crisis, it might be better if some leadership and authority came from outside of Europe with a fresh set of independent eyes," said Goldman Sachs Asset Management Chairman Jim O'Neill, suggesting the zone faced a choice of kicking out weak states or tightening fiscal union.

WHO NEEDS ECONOMISTS ANYWAY?

If she is named the IMF's 11th managing director, Lagarde would be the first not to have had a career path as an economist or civil servant at a national central bank or finance ministry.

IMF insiders say Strauss-Kahn's economic expertise was an asset during the global credit crisis of 2007-09, when it had to adapt fast to the worst slump since the Great Depression. In a break with the IMF's traditional approach, Strauss-Kahn advocated Keynesian fiscal stimulus to world leaders.

"It's not just about reading staff reports: at some point managing directors need to act on their own ideas," said one of his former IMF colleagues, who asked not to be named.

"DSK was great at that because he had the economics background. If he took risks, they were not so great because he knew what he was talking about...With someone without that expertise, it would be different."

An economics PhD, however, does not guarantee success: former Spanish finance minister Rodrigo de Rato's chaotic 2004-07 tenure was regarded as a low point for the IMF, partly because of a collapse in demand for its lending.

Senior French officials acknowledge Lagarde's lack of economic expertise compared with someone like Strauss-Kahn, but argue it would not necessarily harm her performance.

"We were lucky to have someone as well qualified as Strauss-Kahn during the crisis...but the IMF is already full of economists," said one source. "What you need is someone who understands the issues, who can negotiate and give leadership."

(Reporting by Daniel Flynn; Editing by Catherine Bremer and Andrew Torchia)

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