The new IMF chief, Christine Lagarde, started work this week as what The Economist called "chief firefighter." The Greek debt crisis will surely be on top of her agenda as she continues the bailout policies established by her predecessor. A consensus vote confirmed her candidacy following the ignominious departure of disgraced Dominique Strauss-Kahn, with the eventual support of the U.S., China and Russia.
Many IMF members feel that the time has come to end the deal established in Bretton Woods in 1944, where the U.S. gets the leadership of the World Bank and the IMF leadership goes to a European. With 43% of the IMF capital now provided by emerging countries, they are entitled to have more say in IMF leadership and should expect to in the future.
However, as Stewart Patrick of the Council on Foreign Relations wrote recently: "The apparent lesson of this episode is that while emerging powers are quite content to criticize existing global institutional arrangements, they do not yet constitute an effective bloc that can unite behind an agreed program of action."
Perhaps Mme. Lagarde will be a one-term IMF leader and will use the position as a stepping stone to the French Presidency in 2017 whether Sarkozy wins in 2012 or not. When Sarkozy sent Strauss-Kahn to the IMF in 2007, he was removing a potential competitor. Now with Mme. Lagarde, he may be grooming a potential heir and successor.
But first of all, she must establish herself at the IMF. The problem with Christine Lagarde however, is that she is the Eurozone candidate at a time when the Eurozone is in crisis. In spite of her assurances that she is well placed as a European to lead the IMF's role in the crisis, others have questioned the potential conflict of interest. Lagarde will find it difficult to represent IMF membership at large and even though she has stated she intends to be "relevant, responsive and legitimate" in her representative role, inevitably she will be seen to be aligned with the EU.
Also in the general euphoria of having an elegant, articulate woman in a position usually held by a man, it is conveniently being overlooked that Mme. Lagarde is presently under investigation in France for allegedly abusing her power in bypassing a procedure to grant $300 million to former French Minister Bernard Tapie.
Abuse of power appears to come easily to the former French Finance Minister. Since her appointment in 2007, she has played a leading role in defending the European single currency system. By denying that Europe had any serious issues as the global meltdown of 2007 and 2008 accelerated, she helped create the situation that today has been described as the IMF "gambling for Eurozone resurrection with other people's money."
So what is the future of the European Monetary Union now the IMF has been called in to help? When the Euro was founded in 1999 with the Lisbon Treaty, the European Central Bank was established to provide stability for member nations, with each member state looking after its own budgetary and borrowing needs. To bail out Ireland, Portugal and Greece, the rules had to be changed. Described as a "limited treaty change", Europe's leaders, without a popular vote as ratification, now have to stand as guarantors of each other's debt. Acknowledging her role in this, Christine Lagarde in a Wall Street Journal interview agreed that "it's a major adjustment." The change in the Euro's foundation was necessary she said, and "we violated the rules because we wanted to close ranks and save the Eurozone."
The rescues of Greece ($150 billion) Portugal ($120 billion) and Ireland ($130 billion) were major transgressions of the Lisbon Treaty which previously had prevented bailouts. Under the rules that established the euro nearly 12 years ago, countries were obliged to keep their deficits below 3% of GDP and their total debt below 60% of GDP. These rules have been constantly ignored and now because of the least responsible members of the Eurozone, the newly formed European Stabilization Mechanism gives the EU power to bail out member states along with strict conditions relating to taxation, spending and economic policies.
Mme Lagarde has said, "We have to have a stronger convergence process, discipline and sanctions." And presumably from now on this will take place in coordination with IMF "best practices." In the meantime, the people of Greece are being asked to make huge sacrifices to conform to austerity measures being imposed by the IMF. This has brought about civil unrest, attacks on politicians and continuing bloody demonstrations on the streets of Athens.
So will Mme. Lagarde preside over a strengthened European Monetary Union or the formation of a United States of Europe? Or will she concede that the Euro is a good idea gone wrong? As one of the creators of the Euro, she is also a creator of the crisis. When asked if Europe's sense of solidarity will be enough to preserve the Euro, the only reassurance Mme Lagarde was able to offer was, "I should hope so." As the crisis deepens, hope will not be enough.
Dr Azeem Ibrahim is a Fellow and Member of the Board of Directors at the Institute of Social Policy and Understanding and a former Research Scholar at the Kennedy School of Government at Harvard and World Fellow at Yale.
More writings here: www.azeemibrahim.com
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Follow Azeem Ibrahim on Twitter: www.twitter.com/AzeemIbrahim