The Problem With Christine Lagarde

By Simon Johnson

Ms. Christine Lagarde, French finance minister, is the nominee of the European Union for the recently vacant position of managing director at the International Monetary Fund.  The EU has just over 30 percent of the votes in this quasi-election; the US has another 16.8 percent and seems willing to keep a European at the fund if an American can remain head of the World Bank.  It should be easy for Ms. Lagarde to now travel round the world engaging in some old-fashioned horse trading, along the lines of: Support me now, and I or the French government will get you something suitable in return, either at the IMF or elsewhere.

The contest to run the IMF seems over before it has even really begun.  But Ms. Lagarde has a serious problem that may still derail her candidacy, if there is ever any substantive, open, or transparent discussion of her merits.  There is major design flaw in the eurozone and Ms. Lagarde is the last person that non-European governments should want to put in charge of helping sort that out.

Ms. Lagarde is explicitly being put forward as someone who can represent the interests of the eurozone – at a time when the eurozone needs help.  And it really is the eurozone as a whole – including France – that needs help, not just a couple of errant countries (Greece, Ireland, Portugal, and whoever might be next in line for market fears about its government debt and growth prospects).

The founding assumption for the eurozone in 1999, which became a myth during the early 2000s, is that eurozone countries would converge in terms of productivity levels – to put it starkly, Greece would become very much like Germany.  In that view of Europe, it did not much matter if some countries within the eurozone ran current account surpluses while others ran large deficits. 

The deficit countries could finance themselves with loans from the surplus countries, the reasoning went, because they would use the money for productive investments and economic growth would allow them to keep their debt levels relative to GDP under control.

None of this happened.  The productivity gains were seen more in Germany and some other North European countries; unit labor costs, reflecting the net effect of productivity gains and real wage increases, rose sharply in Mediterranean Europe.  And French, German and other “core” banks facilitated this divergence with a surge in lending to both consumers and governments in the periphery – convincing themselves, shareholders, and regulators that this was low risk.

Most of this is not Ms. Lagarde’s fault, of course, as she only became French finance minister in 2007 – although she certainly played a leading role in denying Europe had any serious issues as the global financial crisis began to brew in 2007 and early 2008.  But the bigger issue that more recently she and the French authorities in general have been at the forefront of efforts to deny there is any deep problem and to resist a systematic solution.

France worked long and hard to prevent increases in bank capital during the recently concluded Basel III negotiations.  Bank capital is a buffer against losses; as long as this remains as low as the French government wants, there is no safe way for any eurozone country to restructure its debts.  Low bank capital creates serious systemic financial risk for Europe and the world.

Relatedly, Ms. Lagarde has led the “no restructuring” school of thought in recent months with regard to Greece – and presumably other eurozone countries also.  Debt restructuring is no kind of panacea.  But to take the option completely off the table is also not smart – unless you really think there is no deeper issue that must be addressed.

The eurozone in its first iteration has failed to operate as intended.  Unless you think Greece can now experience a miraculous productivity transformation, the eurozone leadership needs to make a choice.  Do they integrate more, including with generous fiscal transfers to poorer, less dynamic member countries, where people do not like to pay taxes; or do they ease some countries out of the integrated financial system, creating two tiers of participation in the euro currency area – in which some eurozone countries cannot borrow from the European Central Bank?

Either way, the International Monetary Fund can potentially help with loans and with technical advice.  But such money belongs to the international community – there are 187 member countries after all.

And it would need to be a lot of money.  If Ms. Lagarde becomes head of the IMF, she will most likely continue to throw loans at the eurozone problems – if there are even preventive programs for Spain, Italy, or Belgium, the IMF will need to tap its shareholders for at least another $1 trillion in credit lines.

Ms. Lagarde personifies the strategy of gambling for eurozone resurrection with other people’s money.  Why would taxpayers in US and elsewhere want to support her on this basis?

An edited version of this post appeared this morning on the’s Economix; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

44 thoughts on “The Problem With Christine Lagarde

  1. Mostly because most of the IMF’s money comes from the EU (32%) as opposed to the US (17%) or China (around 3%).

  2. Since when did 32% represent a majority or “most” and where? In Euro-la-la-land?

  3. Lagarde’s candidacy is a disastrous case of business as usual, and should be opposed on moral and practical grounds. In addition, to significant opposition from the BRICS group, I can only hope that some other large and stable economies (Australia and Canada to name two) have a clear sense of how their resources will be squandered in Europe. The strongly worded from the BRICS leaders should be taken seriously. In the end, the US will play the deciding role in the choice of IMF head, and we can only hope that our government will look to the future and not the past.

  4. Simon,
    Great article on IMP and Lagarde, except you offer no positive suggestions “going forward”
    Pursuant to your comments perhaps the chairmanship should be made up of a triumvirate – one member from Europe, one member from BRICS, and the third from “MINORITY MEMBERS”?

  5. Europe contributes 38% (I read) more than twice more than the USA’s 17% to the IMF. Why should Europe never profit from it? Is the IMF supposed to be just a way to extract more money from poor countries, on behalf of American banks?

    Although I am not familiar with the specifics of Lagarde’s wishes, the entire French political class is pretty much united behind the idea of fiscal responsibility, fiscal integration, and the necessity for people in countries such as Greece (or Ireland for that matter)to pay taxes, and not get a free ride.

    It’s the Germans who have been resisting fiscal integration. But they are slowly converging towards the French position of tax and verify.

  6. Someone help me, please! Mrs. Christine Lagarde is a bonafide sui`generis lawyer.
    Employed by the 2nd largest lawfirm in the world…Chicago{?} based, “Baker & McKenzie in 1981 – executive committee 1995 – chairman 1999. The creme de la creme savoir-faire…that being said – *Lawyer’s, Economist, and Financial Secretary’s still have unique individual inane mindset. Or better said, a group-think “inside-the-box” nurtured mentality, whereas an inevitable tendency to be hoisted with ones own petard would surely follow this one-size-fits-all triad.
    Really having a hard time figuring this one out, Simon?

  7. \”France worked long and hard to prevent increases in bank capital during the recently concluded Basel III negotiations.\” And
    \”In a similar vein, Ms. Lagarde has led the “no restructuring” school of thought in recent months with regard to Greece \”

    Which government or leaders are currently supporting regulation that would force banks to increase capital by raising equity and are also for a real restructuring which would mean big losses to investors – mainly banks.

    I can’t think of anyone.

  8. Lagarde will never restructure the debt. Why?? Because Lagarde is a bondholder crony and creditor crony. Lagarde is a slave to the bond market. Lagarde would sooner see Greeks, Italians, and Spanish starving to death and/or killing each other in the streets, than make bondholders restructure or even so much as ask bondholders to compromise. Lagarde might as well have a neon sign on her forehead that reads “Bought and paid for by Euro bondholders” because that is her endgame.

    Of the candidates mentioned, Stanley Fischer is the best by far. He would be the most equitable among all the different interest groups, a guy who is very resourceful to find answers to probs, and a proven man when it comes to ability to perform the job.

  9. What surprises me is that few people notice that the head of the IMF is a technocratic economic position. Knowledge of economics should be a prerequisite for consideration. As a lawyer, Lagarde arguably has none. (Her experience with finance is irrelevant.) Putting her in charge of the IMF is akin to putting an economist on the Supreme Court.

    In contrast Mexico has put forth the candidacy of Agustin Carstens. Carstens is head of the Mexican Central Bank and holds a PhD in economics from the University of Chicago. He is amply suited for the position but has received lukewarm support.

    Of course this seems to be a trend in European politics. Trichet, as head of the ECB is a mining engineer/political scientist. This explains a lot about what is wrong with the eurozone these days. Now they want to spread this lack of qualification to a global institution.

  10. This comment directed to Mark Sadowski,

    Although I am neutral towards Carstens, you make some excellent points. Really if you look carefully at a lot of these EU officials, it really is like an episode of “Keystone Kops”. They almost make Geithner look like a “real professional”. Bruce Krasting (a very good blogger generally, although I hate his politics) has has some classic posts on the Swiss National Bank (SNB). Often times a lot of European market intervention is done through the SNB, including when the U.S. Federal Reserve comes to there rescue with huge non-conditional loans. The guy who heads the SNB (Hildebrand) is 100% clueless, and if you follow it closely, it really is quite the laugh riot. Check out these posts by Krasting, especially the last one of the four:

    I’m going to try to post another video, pretty closely related to what you’re talking about. I’m going to put the video in another comment below this one, as I don’t think the video will imbed if I put it in this comment.

  11. Nigel Farage on the EU. One of the funniest things I’ve ever seen in my life (at least one of the funniest things I’ve seen in my life that wasn’t originally intended to be funny). Something about this cracks me up every time I watch it. This should be required viewing for Lagarde.

  12. Thank you, Moses. I was going to write my reply anyway, but Mr. Farage stole a bit of my thunder.

    Simon, as always, I love to read your views. I see Ms. Lagarde’s nomination in much the same light as I saw Ben Bernanke’s when Obama decided to keep him at his post. It is obvious to most of us, if not all, that the largest banks in the world are really the most influential when it comes to major economic decisions, especially in the West. Not only are governments unwilling to increase capital requirements and cause a restructuring of finance in so doing, but they are willing to walk much further out the gangplank toward the abyss in every other way to appease their political backers.

    Mark my words, if we leave governance in the hands of those who would willingly destroy the world for a buck and damn the rest of us in the process, then all is going to be lost. The dominoes are in line. Touch one, and we will have a crisis which will consume most of the world’s economies. I am completely amazed that that the other economic powers even attend these conferences or remain members of the IMF (which could, at this point be renamed the EMF, since only Europe seems to matter to it). I really think that your wonderful article is quite restrained, in that sense. China, India, Brazil, et al, should really be terrified. If the Eurozone collapses (seems a decent bet at this point), their exports will fall drastically and immediately, and then all hell will break loose. I want truly and deeply to be wrong.

  13. Moses Herzog,
    I glanced at your links concerning the SNB and enjoyed the video of Nigel Farage venting his rage at the EU as well.

    I’m a fan of the euro project but needless to say I’m very distressed at the way the ECB has been run with Trichet at the helm. Hopefully Mario Draghi will be an improvement but I suspect he is facing huge pressure from the Germans to fight their (nonexistent) inflation rather than worry about the horrendous depression on the periphery.

    I have to confess that know little about the SNB. I googled Philipp Hildebrand’s education. Apparently he has an MA and a PhD in international relations. He has a BA from Toronto (1988) but it seems impossible to find out in what field. Usually when people have a degree in a relevant subject it is listed so I strongly suspect he is just another European central banker with absolutely no formal education in economics. Thus the results you reported are as expected.

    This is what happens when politics takes precedence over credentials.

  14. Legarde, Legarde, hummm.

    This is the chick who was sleeping over in one of the palaces in Tunisia the month before the revolution, right?

    The girl who almost got thrown out of government for errors of judgment?

    Oh well, its been a whole four months.

    And its Old Europe after all.

  15. Moses Herzog,
    I’ve come across an interesting parallel between Lagarde and Hildebrand. Lagarde was a synchronized swimming champion. Hildebrand was an Olympic smimmer. Evidently this is the prerequisite for important economic positions in Europe these days.

    This makes me feel so much more confident. As long as Esther Williams is in charge of the IMF what could go wrong?

  16. “And French, German and other “core” banks facilitated this divergence with a surge in lending to both consumers and governments in the periphery – convincing themselves, shareholders, and regulators that this was low risk”.
    True, instead of admitting that they made bad investments for which they should take simply a haircut, they want to continue the Ponzi scheme and create money out of thin air…There are no “too safe to fail” assets, not even sovereign debt.
    One could wonder why another French for the IMF job…

  17. By her own frank admission in an interview with the WSJ last December:

    Lagarde knowingly entered into a conspiracy to break the EU treaties.

    “We violated all the rules because we wanted to close ranks and really rescue the euro zone.”

    “The Greek and Irish rescues – €110 billion and €67.5 billion, respectively – and the creation of the bailout fund were, Ms. Lagarde said, “major transgressions” of the Lisbon Treaty that is the European Union’s governing document. “The Treaty of Lisbon,” she says, “was very straightforward. No bailing out.””

    By normal standards that should be enough to disqualify her from any position of trust.

    Certainly she should not be put in charge of another treaty-based organisation, the IMF.

  18. @ Mose Herzog

    In regards to sweet talkin, “Nigel Farage”- the British Empire was implicitly endogenous too the crumbling of the “Irish Economy”, period! Furthermore, last I checked the proud English guard nationalized its banks…and at whose expense?
    England isn’t a democracy? But, by all means, it’s a Monarchy! Where everything must be run-by “Pompous Mom” for approval.
    Ironically, the “Euro” isn’t their currency either, but they sure the hell except its best-of-both-worlds’ benifits, which I might add are very gratuitous, indeed! Perhaps, Nigel should stick to “Carrying his Coals too and from Newcastle”
    His “Hue and Cry” are that of a parliamentary pretentious hypocritical oath ad`absurdum…this empty cupboard of kabuki theater! Finally, the synopsis of this bellicose bohemian are out of touch with reality regarding this surly fallen politician[?] “Sir Nigel Far`age”?

  19. I don’t know who that gentleman Nigel Farage is, but that was a fiery presentation, which to my mind, aptly summarized this continuing depression. At least someone “powerful” isn’t in a permanent coma.

    Moses, thanks for sharing it, the shots of the “stiffs” listening to the speech were funny.

    Nigel mentioned Portugal and Spain. Unemployment among the young people (18-26) there is something like 43%. Protests were held all over Spain last week. These demonstrators were ordered to disperse by beefy, gun-wielding, baton-carrying Planet of the Apes police, in a sign of the times. As Nigel says, the amount of debt for Spain exceeds the total amount in the Euro-kitty, what then?

    Here are some clear photos taken in Barcelona documenting the

    The writing on the wall is clear, can general war be far behind?

  20. I guess the Israeli Government plan of mass murder and genocide of women and children in Gaza (2008),
    followed by slow starvation isn’t working???,0,5460291.story
    One wonders if Binyamin Netanyahu lost all of his OTHER notes from his University class of Diplomacy 101. Then again, we might not want to know what Netanyahu’s plan B is…..

  21. @Earle: It appears that Mr. A’s rationalities are being questioned,(even today), but why did he presume that “the”-vs- “a” president Obama would do whatever, in addition too none of the commenters I read even cared to notice it. Some real good phrases with that article too, thanks fer diggin. : > )

  22. Seems to me the best person would be an honest accountant who still understands double data entry…

  23. @ Owen Owens

    “Are the Swedes sucking on the Swiss teat`s for temporal sinecure (simony & ideology) conterminous continuum?”

    After all, the Swedes being the norm (religion?), have not the symbiosis attributes to co-exist fiscally (stern $$$ criterion) with the “Calvinist Swiss”? Again, the question that should be asked is where is “Waldo”? The answer please…it’s on the back-of-the-envelope – “Basel”! Surprised?

    Ref: “Get on with it” (5/28/11) – “Fisching for a job” (5/27/11) – “En Garde” (5/26/11)
    Thankyou Simon and James

  24. Christine Lagarde est une très bonne candidate. Elle mettra son expérience de juriste inernationale au service de tous les pays avec impartialité. De plus elle connait très bien les Etats Unis pour y avoir dirigé un grand cabinet d’avocat

  25. Dear Moses Herzog:

    I enjoy reading your comments, and look forward to them.

    I absolutely agree with your assessment.

    Christine Lagarde’s choice is misguided. Two words: GLASS CLIFF.

    We’re witnessing the European Project’s painful death watch. By next decade the experiment will be relegated to history’s dust bins.

  26. Question to Mark Sadowski:

    Can you please explain for us what on earth it is that appeals to you in the running disaster that is the “Euro Project” ? And are you refering only to monetary union or also to the federalists’ goals of a United States of Europe ?

    As a Euro-sceptic englishman I am willing to forgive you if you are from the USA on the grounds that you probably are indoctrinated with euro-babble. If, on the other hand you are a European and/or live in Europe, then I am surprised that the penny has not dropped that the Euro zone is headed ont othe rocks.

  27. update for Whoop

    Nigel Farange is the head of the UKIP; that is, the United Kingdom Independence Party. He is elected as a Member of the European Parliament, as a member of UKIP. He is a self made man having made money as a trader in the City of London. He is not everyone’s taste in terms of style. but the beauty of him is simply his courage and simplicty of style. Just look at the body language of all the other MEPs in the video who are life-serving political also rans and usually all on the Left of the political spectrum. Farange is a good speaker. his party has steadily developing support in the UK; not least because the Tory Party under David Cameron has only weasle words to say about engaging head to head with the federalist intents and policies of the Brussels bureaucracy and executve. The entire edifice of EU institutions is a mix of anti- democratic, centralising, utopian, and authoritarian powers. The underlying fundamental assumptions written into the founding Treaty of Rome, and harnessed with steadily increasing severity in later treaties (Maastricht, Madrid, Lisbon) – namely, the irreversible and ever-increasing closer integration (political and economic) of the member states – makes no sense from either a historical, political, cultural or economic perspective. The current generation of European political elites who pursue these ideologies are either deluded or so blinded by their political ambitions for power and influence that they are now the enemies of those who want Open Societies in the sense embraced by Karl Poper.

  28. Eric

    Vous revez je crois. Lagarde est peut etre intelligente avec des experiences utiles dans le domaine. Mais, “impartielle” ? Comment ? Elle soutiens 100% la ligne officielle des elites politique en europe pour un bail out de la gréce.

    Elle n’ est pas d’ accord avec l’ idée que les banques acceptent leur résponsibilités pour des mauvaises investissement avec des restructurations et/ou des pertes. Donc, elle protéges plutot les interets des banques avant le peuple/les contribuables.

    Bref, si elu elle continuera d’ etre un “insider” incapable de resoudre les problemes de dette des gouvernements en europe.

  29. Letter in today’s London Daily Telegraph:

    “SIR – Christine Lagarde, the French finance minister, is being touted by many, including the Coalition government, as the best candidate to replace Dominique Strauss-Kahn as leader of the International Monetary Fund (Business, May 28). She says that she should get the job because she wants it, and on merit.

    In December last year, in relation to the EU bail-out (the European Financial Stabilisation Mechanism) that exposed British taxpayers to failures by eurozone countries, she said: “We violated all the rules because we wanted to close ranks and really rescue the eurozone.” The European Scrutiny Committee has stated that this mechanism was “legally unsound”.

    Ms Lagarde insists that European politics must prevail over the rule of law. It is this kind of attitude and policy that undermines international financial stability and disqualifies her for the post.

    Bill Cash MP (Con)
    London SW1”

  30. @ Andrew54

    Indeed…The British, and yourself have had Thatcher: A bonafided “Reaganite Protege`”!
    Majors a welfare queen? (Pre-Post Margi?)
    Tony “the Tiger” Blair: the Bush’s (crony umbrella- mascot for a ‘Withering Height’s’sequel?) lapdog that co-conspired – circumventing, and braking International Laws of Engagement for “Dessert Storm” and Operation Iraqi Freedom with absolutely no evidence of “WMD’s” or Kuwait’s deliberate slant-drilling encroachment of criminal malfeasance? The subsequent killing (slaughter) of hundred’s of thousands? But they were within, “Their Law’s”!
    Gordon Brown: This passe` Mr. Avatar, “gilding-the-lily” of nowhere!
    Finally we come to “David (pause, speak and then think?) Cameron”! The “Libyan Freedom Fighter for His Majesty’s People” (such noble people those steadfast stalwart English?)! This anomalous bifurcated and confused English doughy Cartesianism. Seemingly holding fast as he might – “Tilting at Windmills”!
    Thusly you have the encyclical discourse to call a spade a spade while clinging to the precipice of Gaul?

    The EuroZone is fine, and the sooner the stubborn “Brit’s” join, the better. (JMHO):-))

  31. Andrew, thanks for that update, it was all good.

    “The entire edifice of EU institutions is a mix of anti- democratic, centralising, utopian, and authoritarian powers.”

    USA institutions do not fall far from the tree, either. I see here that our “utopia” is a growing dystopia for a significant number of Americans.

    While we drift through pernicious nihilism, we realize the roots of discontent are concealed by and connected to a dangerously radical set of constructs. These beliefs are antithetical to the promotion of human beings across the planet.

    We steadily see the focus: inhumane domination, wealth-concentration, abolition of liberty hard won, and the subjugation of honest labor to predatory controlled-market forces, abrogation of the rule of law, and uncontrollable criminal enterprise.

    Throw in hired goons armed to the teeth, and you have the making of another Hell.

    They want the internet now, enjoy it while you can…the last best best hope for humankind may soon be unavailable.

  32. Earle Florida

    your comments are, at best , difficult to decipher, verging on the incoherent. however, i detect some underlying anti english opinions ? you are welcome to your views. If you want to be credible however, I suggest simply that you work a little harder on your arguments. then at least we can all understand them and argue pro or contra with some semblance of transparency and logic. regards

  33. Woops

    thanks for your reply. I have some symppathy for your view about the growing attrition on liberty in the western world. I think that this is a trend that is far from finished as the economic crisis moves inot a new phase of intensity during 2H 2011 and 2012.

    On the other hand, I do not agree with your “anti market forces” sentiment. but that is a long and separate discussion. Before hand though please read F.A. Hayek’s “The Constitution of Libery” which, in my opinion, is one of the most profoundly intelligent published books on the matter of liberty in modern societies.

  34. Dennis Cooper

    Thanks for the letter published from Bill Cash. As usual he is right on the money.

    Bill has been against the Compteian utopias of the continental political elites for over 25 years. He has not sought to join the “gravy train” of fawning career politicians intent on catching the crumbs that fall from the table of the political elites.

    He says it as he sees it and so is “unsuccessful” (ie. frank and honest)

    We need a new generation of politicians with real political beliefs grounded in empirical assessments of the national interest; willing and capable to fight head to head the Leviathan which is the catastrophe of European Institutions and their acolytes.

  35. Or can he explain away the phrase “Penny wise AND pound foolish” before someone swipes his money while he is not looking.

  36. @ Andrew54

    “a mouth full of marbles churning their alphabet cock-a-leekie soup
    swallows naught these scrabbled words of discontent
    echoes only ones sophomoric dyadic
    past unmutable trollops
    caging wingless birds for folly
    oh thy matriarch have mercy on its wondering orphan
    have mercy master heathcliff
    for thou has stolen our sunset”

  37. Earle

    Finnegan’s Wake ? if not, educate me on this one.

    not sure though what it has to do with Lagarde’s candidacy for the IMF or with Europe’s debt crisis.

  38. The Euro integration project appears to be another good idea gone wrong or maybe the whole idea was to make it easier for the elites to control Europe. Ms Lagarde does sound like the perfect candidate for those who are running the world. It’s not her lack of economics credentials, I don’t see most mainstream economists as being in touch with the real world. They certainly were not on top of the last meltdown. Sure seems like another one is a few paces down the road. I enjoyed Nigel Firage’s tirade. everything I read or hear about the Euro project seems to be about bypassing democracy and putting Geithner types in charge.

  39. What’s all this noise about democracy about? That must have been lost, if it ever existed, long ago when majorities stopped participating and being informed. We are trying to fix that here, but please, don’t try to kill a common project for its lacking democratic process and such nonsense!

    The Brits, like anyone involved for that matter, have their right to resist more integration. I’m sure somebody is leveraging such resistance into less payments to Bruxelles.

    However, trying to claim the same things, with a straight face, in front of this crowd won’t go too far without being challenged.

    I am also happy to see regular Americans wishing Europe in not so generous terms–which they also try to pass as thinking. For these, my question is: Would you rather compete with the Chinese in a race to the bottom? Our elites have already decided so with the known results. I suggest we chose a better reference point, and the EU is that, for all intents and purposes.

  40. @woop who opined “While we drift through pernicious nihilism, we realize the roots of discontent are concealed by and connected to a dangerously radical set of constructs. These beliefs are antithetical to the promotion of human beings across the planet.

    We steadily see the focus: inhumane domination, wealth-concentration, abolition of liberty hard won, and the subjugation of honest labor to predatory controlled-market forces, abrogation of the rule of law, and uncontrollable criminal enterprise.

    Throw in hired goons armed to the teeth, and you have the making of another Hell.”

    A classic wrap up, Woop. Yup, we’re up against a lot.

    Gotta start somewhere – Constitutional Convention to get an energy plan in place – here’s the dream ticket to *lead* after that – Pickens and Trumka :-))

    And I still like the military statesman writing under the nom de plume of “Mr. Y”…

    Enough of 30 years of the revenge of the “C” students all becoming politicians and prophets…”drunk and stupid is no way to go through life”….

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