IMF is a troublesome ally

The International Monetary Fund, which recently warned Europe of the possibility of another crisis, forms part of the troika charged with rescuing countries in financial difficulty. However, over the last year under the presidency of France’s Christine Lagarde, the organisation which is often presented as a saviour has adopted a less conciliatory tone.

Published on 18 April 2012 at 15:33
IMF Managing Director Christine Lagarde at a Paris press conference in October, 2011.

Last Christmas, IMF Managing Director Christine Lagarde offered the German Chancellor a trinket from Hermès. Angela Merkel also had a small gift for Christine Lagarde: a CD of the Berlin Philharmonic playing Beethoven.

Notwithstanding this thoughtful behaviour, the personal relationship between the two women is now being sorely tested: in the wake of two years of intense involvement in the struggle to overcome the crisis in Europe, the IMF has begun to openly express its discontent.

In the Dominique Strauss-Kahn (DSK) era, it was reasonable to assume that China, Canada and Brazil would also adopt a similar line, but this is no longer the case. Today’s IMF is very different to the IMF of one year ago. For DSK, who had his sights set on the French presidency, a leading role in the campaign to save the euro was a godsend. Under Christine Lagarde, the IMF has become “a less stable partner”, points out a European civil servant.

A second-tier partner

The difference in personality between economist and politician DSK – who resigned amid rape allegations in May 2011 – and the lawyer and corporate CEO, Christine Lagarde, who succeeded him, only partly explains this change.

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Perhaps more importantly, the IMF is increasingly uncomfortable with the role that has been attributed to it in the “troika” formed with the ECB and the European Commission. In the eurozone, the organisation, which is used to a high degree of autonomy, has become a “second tier partner”.

The Europeans in the troika, who are extremely strict in their approach, mainly take their orders from Germany. In the event of a divergence of opinion, the IMF is often the only member of the troika to argue in support of Greece.

“The IMF should never have allowed itself to become involved in this situation”, remarks Charles Wyplosz, of the Graduate Institute of Geneva. “It has been politically implicated.”

Already, under Dominique Strauss-Kahn, non-European countries were protesting, and critical voices were also raised from within the organisation. But the IMF’s second in command, America’s John Lipsky, was unable to to effectively counter his inspired European chief.

The Director of the IMF’s European Department at the time, Antonio Borges, who was also a former deputy governor of the Banco de Portugal, was similarly reluctant to speak out against his boss. A Portuguese director with responsibility for Portugal – this was also one of Dominique Strauss-Kahn’s initiatives.

Strauss-Kahn decided everything. He telephoned heads of state and sat in on European summits. He had considerable influence with the German Chancellor, and had just boarded a plane Berlin when he was arrested. Angela Merkel was plunged into a state a shock. ”This is serious”, she said when she heard news of the charges, “I need him!”

Shortly after the departure of Strauss-Kahn, Lipsky also left the organisation. According to Charles Wyplosz, his successor, David Lipton, is ”very powerful. He works under instructions from Clinton and Obama and embodies the opinion of the White House. Lipton believes that the European measures to counter the crisis are worthless”.

An extended critique of Germany’s European policy

In November, Christine Lagarde dispensed with the services of Antonio Borges. His replacement, Anglo-Iranian Reza Moghadam, who is a competent official with no specific links to the eurozone, has been appointed at a time when the management of the IMF is increasingly adopting an Anglo-Saxon approach rather than a European one.

The British and the Americans have tightened their hold on a crisis, which has prompted two schools of thought on the issue of countermeasures: on the one hand, there are the proponents of budgetary discipline, and on the other, there are those who argue that austerity represents a danger to the economy. Angela Merkel has demonstrated her allegiance to the first of these, Christine Lagarde is now identified with the second.

Outside of the framework of the troika, Christine Lagarde has sent an IMF team to Italy. She wants European banks to raise more capital, and favours protecting the eurozone with a gigantic firewall and eurozone bonds: a position that has met with some annoyance in Europe. During her tenure as French Minister of Finance, Christine Lagarde also pleaded for a powerful bailout fund and eurozone bonds, but at the time Angela Merkel succeeded in brushing aside both of these proposals. However, the German Chancellor will meet with increasing difficulty in maintaining this position now that Europe wants to obtain funds from the IMF.

Recently, all of these issues surfaced in speech delivered by Lagarde in Berlin. The previous evening, at a private dinner with Angela Merkel, she offered the German Chancellor an orange blossom scented candle symbolising “hope”. As Christine Lagarde later explained, it was intended to set the tone “in the wake of difficult discussions” prompted by a preview of the text of her speech, which was an extended critique of Germany’s European policy.

Forecast

IMF’s warning to European leaders

"IMF warning: euro might come to an end," headlines i, after the April 17 release of the IMF World Economic Outlook report, in which the International Monetary Fund issues a series of recommendations to EU leaders, among which "more interest rate cuts by the European Central Bank, less austerity and creation of eurobonds".

However, the Lisbon daily says that -

A collapsing euro is not the main scenario for the IMF - which anticipates that the world economy will grow 3.5% this year and 4.1% next year - but in reading the document and in harking to the words of the institution’s chief economist, one can perceive that, for the Fund, the European risk is huge. [...] The meaning of this for the single currency - in the world’s largest economic region - is that this absence of bold measures to resolve the crisis, is beginning to make itself felt in IMF’s communications to Europe, especially to the influential leadership of Chancellor Angela Merkel.

The message, according to an economic historian, quoted by i, is that -

The IMF and the United States are increasingly losing patience with Europe - the disagreement is not so much about how to emerge from the crisis, but has more to do with the fact that the German government is tied to a certain atavism and to what their constituents say they want.

In addition to creating eurobonds, the Fund "also wants the ECB to continue to lend money to European banks".

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