Mme. Lagarde: Where Are You When the World Needs You?

A letter to Christine Lagarde, Managing Director of the International Monetary Fund (IMF)

Dear Madame Lagarde,

Europe is in deep trouble, possibly on the verge of catastrophe, and as a consequence so might be the world. You represent that world and you need to act quickly and decisively, and I am afraid somewhat solitarily. You need to quickly mobilize international resources to help address the problem in Europe, which in turn would help minimize the risks to the rest of the world.

You will have to fight and win this case on intellectual merits because most of the major powers will either explicitly resist you (Europe, especially Germany), subtly undermine you (the United States), or not support you enough (China and India).

Europe will keep telling you that they will call upon the Fund if and when they need it. You too keep echoing that by saying, “If Europe needs us…etc., etc.” You should stop taking your cues from Europe. Europe thinks it has the resources to avoid this Armageddon—maybe it does but it, or rather Germany and the European Central Bank, are behaving as if they do not have the money or are unable to mobilize the money. In any event, you and the world cannot afford to dance to the tune of European dithering and brinkmanship. The fact is there is some—non-trivial and rising—probability that Europe and the world will need the resources of those able to provide them in large quantities and quickly to avert meltdown or its aftermath. You need to mobilize those resources fast.

The fact is a tectonic shift has occurred in the global economy: The identity of potential international borrowers and creditors in the future has changed. More and more of the larger countries and yesterday’s creditors are today’s potential borrowers. Some have indeed started borrowing, and the queue of those with cap in hand outside your door is lengthening.

Today’s financial crises, like the 2008–09 crisis in the United States, requires invocation of the Powell doctrine: the application of overwhelming force. Calming markets requires occasionally reminding them that they can be reduced to irrelevance by enough firepower on the other side. Combine this doctrine with the prospect of many countries the size of Italy borrowing from the IMF in the years ahead, and you quickly realize that the IMF needs at least 1 if not 2 trillion dollars worth of resources, hopefully most of it serving as insurance. But if you actually do need to use the money, wouldn’t you be glad that you had mobilized it beforehand? The case for a bigger IMF is therefore both short-term—dealing with Europe—but also long term because of the nature of the countries that have become potential supplicants.

You cannot get these large sums of money right away, but you need to make a start right now.  You need to present a plan to that effect in the next few days and dare the G-20 finance ministers, who are due to meet soon, to overrule you. Remember, you have first-mover advantage. You propose. You define the default. You shape the status quo. Effort is required on the part of the others to defy or obstruct you.

I want to go through the depressing list of sources of opposition or lack of support for such a plan and how to deal with them. But let me offer advice on who you should have on your side in order to take on this weighty array of naysayers.

Brazil and Russia: Brazil and Russia have shown that they will support you. Brazil genuinely believes in the need for cooperation in times of trouble and has already offered to put up some cash. And Russia likes to flaunt its oil wealth and desperately wants to regain its Soviet-era seat at the table. Forget the motivation, take the cash and support. Hopefully, other oil exporters—such as Norway and Saudi Arabia—will also contribute.

China: Following the oil is generally a good strategy, but following China is essential. Only China has the kind of cash to make your initiative succeed. There are two ways to persuade China: the direct way and the manipulative way. The direct way is to say that China, for its contribution, will be given a much bigger say in the way the IMF is run.

I have written elsewhere that China needs to be given power in the IMF equivalent to that of the United States and greater than that of Europe. You need to convince China that you will make that argument forcefully and if necessary take on your erstwhile French colleagues if they resist. That is key. On this you must speak with conviction and daring.

Page 1 of 3 | Next page