First female head for IMF?

The appointment of Christine Lagarde, the current French finance minister, as the next managing director of the International Monetary Fund now seems a fait accompli. The countries of the European Union unanimously support her candidacy, and since the recent G8 summit in Deauville it looks as if Mme Lagarde can count on the United States as well.

Within the IMF the European Union still has 32 per cent of the votes, and the US another 16.7 per cent. Clearly the EU-US bloc continues to rule the waves at the multilateral financial institutions. But one should not be overly cynical about this; Lagarde is facing a daunting task, and both the European unanimity and the American support are for that reason most welcome.

The EU-US dominance of the IMF has been highly contested for years. Criticism of this dominance has mounted in recent weeks because of the question who should succeed Dominique Strauss-Kahn. Among the many critics was Martin Wolf, who wrote about “Why Europe should not control the IMF” in the Financial Times of May 25.

Wolf’s basic argument is that the rise of the emerging economies over the past decade or so has created a new order in the world economy. Given that new economic order, Europe is grossly overrepresented in the IMF, and it is high time to put an end to the historical European monopoly on the top position at the Fund. But in the end Wolf too admitted that he was quite sure that Lagarde would get the job.

What focus?

So we should shift from the question who is going to be the next managing director of the IMF to the question what that managing director should be actually doing. What should Lagarde focus on? What should be her priorities? Obviously she will have to spend much time on tackling the sovereign debt crisis in the eurozone, foremost the debt problem of Greece.

This indeed should be her first priority. Her excellent record as finance minister of a major European country for the past four years eminently qualifies her for that task.

Her second priority, perhaps more important than the first, should be the reform of the global monetary system. The initiative for such reform is largely in the hands of the G20. Since the credit crisis began in September 2008, the group of the 20 most important economies in the world has been preoccupied with restoring and securing financial stability in the world economy, among other things by reforming the global monetary system.

At the most recent summit of the G20, last November in Seoul, the French president Nicolas Sarkozy announced he would do everything he could to achieve such reform during his presidency of the G20, which lasts till the end of 2011. At the next summit of the G20, this November in Cannes, Sarkozy is supposed to unveil the plans for what he calls a New Monetary System.

Sarkozy ally

As a close ally of Sarkozy for so many years, Lagarde is also eminently qualified to collaborate with the G20 president on this New Monetary System.

Earlier this year a special advisory commission appointed by Sarkozy—the Palais Royale Initiative—came up with a list of eighteen proposals for global monetary reform. That list may offer inspiration also to the new IMF managing director.

But to reform the international monetary system effectively, Lagarde will have to invest in collaborating with the emerging economies as well—see the point made by Martin Wolf. Especially the so-called BRICS countries (Brazil, Russia, India, China, and South Africa) are loudly and clearly voicing their opinion on this matter.

At a meeting in April in Sanya in southern China, the BRICS countries announced that they would start using alternatives for the dollar in international financial transactions, thus eroding the monopoly of the dollar as global reserve currency. Also in April, at the annual Boao Forum, China officials similarly indicated that they were aware, and supportive, of Sarkozy’s ideas about global monetary reform to be presented at the G20 summit in November in Cannes, including the use of Special Drawing Rights issues by the IMF as a new global reserve currency.

Sarkozy’s agenda for Cannes is of the highest importance not only for the old world of the developed economies but also for the new world of the emerging economies. Collaboration with these emerging economies, especially the BRICS countries, on monetary reform is perhaps what Lagarde has the least experience with. But it may turn out to be the most important part of her new job. And the most challenging. – Lubbers is a former Dutch prime minister and van Seters