In a wonderful display of consensus, the Executive Board of the International Monetary Fund (IMF) on Tuesday appointed a ‘Chicago girl' as its Managing Director. It's not that Christine Lagarde, a Paris university law graduate, has the academic baggage of a PhD in economic studies from the prestigious University of Chicago - unlike her unique rival for the job, the Mexican Agustin Carstens. Nor is it a reference to the fact that French President Nicolas Sarkozy's outgoing finance minister ended her high-flying legal career at Baker & McKenzie, whose worldwide headquarters are found in the Windy City. Rather, it is because Lagarde owes her appointment as IMF chief to the Chicago gang who today govern the United States from their base in the west wing of the White House.
Before getting to the facts of this edifying story, let's first of all take note that the replacement of Dominique Strauss-Kahn by European candidate Lagarde is seemingly a triumph for the Old Continent, caught in the grip of a deep crisis but nevertheless successful in maintaining its hold on one of the two sister organizations to emerge from the 1944 Bretton Woods conference. It similarly constitutes a defeat for the large emerging countries, akin to dogs that bark but don't bite, whose claims to the post collapsed before their divisions and incapacity to choose a common candidate or to adhere to a coherent strategy.
Above all, it is a success for the Obama administration which, by the designation of someone notoriously unqualified for the job, has assured itself of maintaining for itself the predominant influence at the IMF, just as the debt crisis among the so-called advanced countries now poses an imminent threat to the world's premier super-power.
It all began in the early spring of 2011 when, according to high-placed sources within the institution, the IMF's First Deputy Managing Director, effectively its second-in-command, John Lipsky, informed the White House that he was up for a second term of office after his current mandate expires in August. Indeed, the unwritten rule that has reserved the top job at the IMF since its creation to a European also has it that the No 2 job goes to a US candidate. After keeping the former Chief Economist and latterly Vice Chairman of the JPMorgan bank hanging for a response, Obama's team finally told Lipsky early in May, when he was on business in Beijing, that the answer was negative.
Tee off: Lipton to the IMF, Clinton the World Bank
The question of finding a successor to Dominique Strauss-Kahn, aka DSK, was already in the pipeline before his ignominious arrest in New York on May 14th on sex assault charges. DSK had been expected to step down in June in order to run in the selection process for the Socialist Party candidate to stand in French presidential elections due in 2012. Amidst plans for the reshuffle, the White House had already chosen David Lipton as its future No2 at the IMF. Lipton is a former member of the Bill Clinton administration, just like President Barack Obama's Chief-of -Staff, William Daley, a member of Chicago's most prominent political dynasty. Daley is the son and younger brother to the city's former mayors, the late Richard J. Daley and Richard M. Daley.
Daley was in charge of the plan to place Lipton at the IMF, after being appointed as Obama's Chief-of-Staff in succession to Rahm Emanuel, who left the administration to become, on May 16th, the 55th mayor of ...Chicago. The White House team has been entirely renewed since Barack Obama came to office, notably in the field of economic policy advisors. Paul Volcker, Larry Summers and other strong, independent minds of the first Obama staff, along with the academics and intellectuals, have left and taken their distances. They have been replaced by political operators with no inclination for soul searching.
David Lipton, an advisor to the president on international economic affairs, is anything but wet around the ears. During the 1997-98 Asian economic crisis, he was a key observer for the US Treasury (then led by Bob Rubin and Larry Summers) during the very tense negotiations between the IMF (whose Managing Director at the time was Frenchman Michel Camdessus) and the government of South Korea, a major US ally. In short, Lipton has the qualifications and experience in the field that Christine Lagarde lacks.
But Lipton's nomination for the IMF is not the only objective for the Obama administration, which has begun the campaign for the re-election of America's first black president in November 2012. It must also find an honourable exit for Secretary of State Hillary Clinton. She and Obama ran against each other in the 2008 primaries, and the least that can be said is that their differences have not been forgotten since. Rather, relations between the US President and his foreign affairs minister are downright atrocious, and there is no place waiting for her under an eventual second Obama term of office.
Shortly after Strauss-Kahn's arrest in New York, and when the campaign for his succession had only just got underway, the US press carried reports that Clinton was interested in the presidency of the World Bank. The current president, Robert Zoellick, nominated by George W. Bush following the Wolfowitz controversy, will reach the end of his five-year term in the summer of 2012.
'An incompetent, but ours'
But to all evidence, if the US wants to keep its pre-emptive right to the presidency of the World Bank and to the First Deputy Managing director post at the IMF, it needs the support of the Europeans who still collectively hold more than a third of the voting rights. Thus, if the Europeans chose Lagarde as the candidate to succeed DSK, then the US would back Lagarde. In this affair, US Secretary of the Treasury Timothy Geithner was reduced to playing the role of a useful idiot, deprived of any influence over the US choice of candidate but required to display an apparent neutrality so as not to irritate the emerging countries, and notably neighbouring Mexico. The US declaration of support for Lagarde just before Tuesday's meeting of the IMF board, and the almost as tardy official Chinese backing of the French finance minister, will remain in history as a monument of hypocrisy.
The first conclusion from all this is that, while the European political class is incapable of finding solutions to the major difficulties now threatening the continent's union, and among which the sovereign debt crisis in Greece and elsewhere is but one element, it always shows itself united and determined to ensure a seat of power for one amongst its midst. When, in 2010, José Manuel Durao Barroso was given a second term as President of the European Commission, an editorial in the Portuguese press commented: "He is an incompetent, but he is our incompetent." Replacing ‘he' with ‘she', that so perfectly applies to the nomination of Lagarde as IMF chief.
The second conclusion is that the decision by the IMF's 24 administrators is hardly flattering for the French justice system, which is known for the exceptional treatment it allots to the lords who govern. According to a source close to the IMF, and whose name is withheld here, Lagarde was questioned by the IMF board about the ‘Tapiegate' scandal in which she is embroiled in France (see more on this here and here). She offered the stereotyped reply that she has given to (rare) questions from (mostly French) reporters on the matter; notably this involves a quite amazing detour around the very precise and damning accusations leveled in a report prepared by France's most senior public prosecutor, Jean-Louis Nadal. His report found evidence that she acted in a manner "aimed at obstructing the law" and requests that the Court of Justice of the French Republic, the CJR (which investigates cases of suspected misdeeds by serving ministers), open an investigation into the case.
No place for intuition alone
However, Lagarde has been leant the support of the IMF's law services which concluded, after examining judicial precedents, that it was very rare for the CJR to open a case, and even when it did the procedure was both very long and largely indecisive. In other words, if ever the court's Petitions Commission' - made up of a panel of judges which considers the validity of cases sent for its attention - was to decide, on July 8th, to open the investigation demanded by Nadal, it would in no way bother the new Managing Director in carrying out her functions. What has clearly not been considered is the negative effect on the image of the IMF, rarely the bearer of good news when intervening in a country calling on it for help.
On July 5th, the executor of the grand and, above all, lowly projects of Nicolas Sarkozy will become the fifth French Managing Director of the IMF - out of a total of 11 people who have occupied the post since its creation in 1946. Vive la France! Lagarde will be perfect in her role of delivering, in excellent English, speeches written by her staff. More serious matters will be handled by the 2, 500 or so IMF employees, including hundreds of economists with a competence lacking in their new chief, and, quite soon, David Lipton (or rather, the White House). For better and - more certainly - for worse.
Before being officially removed from the race to succeed DSK for reasons of an imposed age limit, Stanley Fischer, Governor of the Bank of Israel and a former IMF Chief Economist, gave an interview to The Wall Street Journal in which he sharply highlighted his training as an economist against Lagarde's background as a lawyer. "In normal times, you can probably rely on intuition," Fischer said. "But all the time, in different countries, there are serious economic issues", adding that IMF experts often issue conflicting advice. "Without having that [economic] training, it's very hard to know, who's right and who's wrong. You have to have a framework to think through the problems."
Now in Lagarde's hands, one can only wish the IMF ‘Good luck', along with Greece, the potential European debt crisis domino cases and, indeed, the world economy as a whole.
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