Simon Johnson Comes Out Against Christine Lagarde as IMF Managing Director
I agree. He puts the case well:
The Problem With Christine Lagarde : Lagarde is explicitly being put forward as someone who can represent the interests of the eurozone.... The founding assumption for the eurozone in 1999, which became a myth during the early 2000s, is that eurozone countries would converge in terms of productivity levels.... In that view of Europe, it did not much matter if some countries within the eurozone ran current account surpluses while others ran large deficits. The deficit countries could finance themselves with loans from the surplus countries, the reasoning went, because they would use the money for productive investments and economic growth would allow them to keep their debt levels relative to GDP under control.
None of this happened. The productivity gains were seen more in Germany and some other North European countries; unit labor costs, reflecting the net effect of productivity gains and real wage increases, rose sharply in Mediterranean Europe. And French, German and other “core” banks facilitated this divergence with a surge in lending to both consumers and governments in the periphery – convincing themselves, shareholders, and regulators that this was low risk.
Most of this is not Ms. Lagarde’s fault, of course.... But the bigger issue that more recently she and the French authorities in general have been at the forefront of efforts to deny there is any deep problem and to resist a systematic solution. France worked long and hard to prevent increases in bank capital during the recently concluded Basel III negotiations.... Low bank capital creates serious systemic financial risk for Europe and the world.
Relatedly, Ms. Lagarde has led the “no restructuring” school of thought in recent months with regard to Greece – and presumably other eurozone countries also. Debt restructuring is no kind of panacea. But to take the option completely off the table is also not smart – unless you really think there is no deeper issue that must be addressed.
The eurozone in its first iteration has failed.... [T]he eurozone leadership needs to make a choice. Do they integrate more, including with generous fiscal transfers to poorer, less dynamic member countries, where people do not like to pay taxes; or do they ease some countries out of the integrated financial system, creating two tiers of participation in the euro currency area – in which some eurozone countries cannot borrow from the European Central Bank? Either way, the International Monetary Fund can potentially help with loans and with technical advice. But such money belongs to the international community – there are 187 member countries after all. And it would need to be a lot of money. If Ms. Lagarde becomes head of the IMF, she will most likely continue to throw loans at the eurozone problems – if there are even preventive programs for Spain, Italy, or Belgium, the IMF will need to tap its shareholders for at least another $1 trillion in credit lines.
Ms. Lagarde personifies the strategy of gambling for eurozone resurrection with other people’s money. Why would taxpayers in US and elsewhere want to support her on this basis?
