After announcing her candidacy, French Finance Minister Christine La- garde immediately emerged as the front-runner in the race for the presidency of the International Monetary Fund. France, the United Kingdom and Germany all support her, while the emerging economies that oppose her candidacy - such as Brazil, India and Mexico - are unlikely to coalesce behind Agustin Carstens, governor of Mexico’s central bank.
While Ms. Lagarde’s victory might be applauded by European Union political elites, it is far from clear that having a French head of the IMF is desirable in the midst of the present crisis on the eurozone’s periphery. For one, a European politician is likely to have a deep vested interest in furthering the European integration project, possibly at the expense of the IMF’s shareholders - of which the U.S. government remains the biggest one - and at a great cost to Europe’s struggling economies.
Dominique Strauss-Kahn has played a disastrous role by extending a joint IMF-EU rescue package to Greece and subjecting that country to an austerity program that is not working, given the absence of devaluation or serious reforms aimed at restoring Greece’s competitiveness. After Greece ran a budget deficit of almost 11 percent of gross domestic product last year, the most optimistic of estimates predict that its economy will shrink by at least 3 percent this year, further increasing the size of its debt relative to the economy. At the same time, Greek tax revenues are in free fall and there are no signs that the country will be able to consolidate its public finance anytime soon.
The problem of the eurozone’s periphery is one of solvency, not liquidity. As such, it cannot be solved simply by piling up more debt on top of the existing loans and expecting Greek or Portuguese public spending to shrink by unreasonable amounts within a short time.
Those eurozone economies on unsustainable fiscal paths must be allowed to restructure their debts and restore their competitiveness, both via structural reforms and through currency depreciation. However, that would require recognizing that the euro was a flawed project from the start.
Clearly, European leaders, for whom more integration and an “ever-closer Europe” represent the answer to all of Europe’s ills, are not willing to make such a concession. Irish politicians, for instance, have been so unscrupulous as to impose a new levy on Irish citizens’ pension savings in order to boost public revenue rather than give in.
Since entering French politics in 2005, Ms. Lagarde has had an impressive career, holding the posts of minister of trade, minister of agriculture and currently minister of economic affairs, finance, industry and employment. Becoming the first appointed female head of the IMF in history would be a natural move in her career, boosting her chances of holding further high-level positions both within the EU’s governing structures and in France.
However, she will not want to become the IMF head who oversees the unraveling of the eurozone and the default of Greece, Portugal or Spain. She almost certainly will be a staunch advocate of further aid packages aimed at keeping the periphery afloat. This will not benefit Europeans as a whole - and certainly not the Greeks, the Portuguese and the Spaniards, who are needlessly enduring a painful fiscal contraction without being able to regain their competitiveness through an exchange-rate adjustment.
The IMF needs a president who will be able to distance the organization from the vanity of European leaders who have invested lots of political capital into the project of the EU’s common currency. Turning off the IMF’s tap to Europe’s periphery, instead of fueling what is an unsustainable fiscal and monetary arrangement, requires courage and a detachment from Brussels’ groupthink and from the world of EU summits. In this sense, it is obvious that Ms. Lagarde is not the right person for the job.
By Dalibor Rohac, a fellow at the Legatum Institute in London.