European Affairs

Traditionally, the post of Managing Director has been held by a European, but pressures have been mounting in recent years for emerging countries with growing economies in Asia and Latin America to gain more weight at the Fund. This has led to more votes for them and also talk about seeing them put forward a candidate from these countries to challenge the informal arrangement giving Europe a monopoly on the top job.

Already, statements have come out from Germany, Belgium and the European Commission, saying that “IMF leadership should stay in European hands” at a time when the Fund is playing such a central role in the financial crisis around the euro. That view has been publicly espoused by German Chancellor Angela Merkel, whose country is both a powerful player at the IMF and also the principal national bankroller of loans to stricken eurozone nations. A similar position has been taken by Jose Manuel Barroso, the President of the European Commission, who cites the need of any successor to rally strong financial support among the Fund’s largest contributors – implicitly designating a candidate from one of the richer European states.

Already there are signs of growing support for France’s Finance Minister Christine Lagarde as the main contender. Highly regarded in international financial circles, she combines her influence in Europe with years working as a banker in the U.S. She was already being talked about as a successor for Strauss-Kahn in the event that he stepped down this summer to run for the French presidency. His sudden downfall probably adds strength of the argument in her favor.

There are dissenting arguments about the presumption that the post should be kept by a European. For example, see this piece by Nicolas Véron. In this vein, some Fund officials privately say that the Euro crisis does not necessarily preclude a non-European candidate as a managing director now. Indeed, this thinking goes, Strauss-Kahn was personally instrumental as a respected European in persuading initially-reluctant eurozone governments to accept intervention by the IMF, which then became a core element in the ongoing rescue efforts for Greece, Ireland and Portugal.

In that initial phase of the crisis, it was particularly helpful that Strauss-Kahn was well-known and trusted in European political and financial circles after his years as “one of their own” as France’s Finance Minister before coming to the Fund.  Now,  it can be argued, with the IMF role in place, there might be advantages to having a non-European – an “outsider” – in the job and tasked with enforcing the Fund’s often unpalatable medicine in the form of tough conditions on the loans to struggling European countries.

This reasoning is very much a minority view in Western capitals, especially in the current emergency situation. Any change at the top of the IMF would trigger a complicated re-arrangement of several key posts in the international financial system. When the current major global financial institutions were set up after World War II, the Western world’s overwhelming financial weight meant that the World Bank was headed by an American (currently Robert Zoellick) and the IMF by a European, with an American second-in command – a practice adhered to ever since.

Today, “the current EU-US balance at the World Bank and IMF should be kept intact,” says Chancellor Merkel in voicing not just her own view but that of other European leaders. At the IMF, the top deputy currently is Joseph Lipsky, 64, a respected and experienced American, who has taken interim control of the Fund, including the negotiations with Greece and other eurozone countries. He has already been partly handling them under Strauss-Kahn, but Lipsky had already announced (last week) that he will retire in August.

A new chief would serve the remainder of Strauss-Kahn’s five-year term -- supposed to run into 2012 – and then be favored to stay on.

In the perspective of a regular transition, there was already talk about seeing candidates emerge from countries such as Singapore, India, Turkey, South Africa or Mexico. In the crisis situation now, it has become more important than ever that any successor must have great professional and international credibility – and Europeans are stressing the need for someone with strong personal credibility in Europe.

Chancellor Merkel, speaking in Brussels after a eurozone meeting on Greece earlier this week, said “we know that in the mid-term developing countries have a right to the post of IMF chief and the post of World Bank Chief. In the current situation, when we have a lot of discussions about the euro, that Europe has good candidates to offer.”

Amplifying on that theme, an influential financial commentator in the Financial Times, Wolfgang Münchau -- who has often been critical of EU leaders’ management of the euro crisis – agreed that the IMF needs to be run by a European at this juncture . The post must go to “the most capable candidate,” he wrote, but that choice must be viewed in light of the fact that the “new IMF chief will deal with mostly with European issues for his or her first term.”  Since the IMF role has been partly political, bridging difference when national governments could not agree on economic policy, Münchau said, “I wonder to what extent a highly competent Mexican central banker, for example, would be able to fulfill this role?” Agustin Carstens, a former Mexican finance minister under Felipe Calderon and now governor of Mexico’s central bank, has often been cited as a man with the qualifications for the IMF job if it went to a non-European. That view is shared by at least one country whose finances are at stake – Ireland, whose Finance Minister Michael Noonan has said that the IMF replacement at the helms should be a European.

Britain, while not a member of the eurozone, is a major player at the Fund, and British officials say an emerging market candidate is still an option and that the UK is reserving its position, but that Prime Minister David Cameron would be “very happy” to back a strong European candidate if one emerged. Gordon Brown, Britain’s former Labour prime minister, has been quietly lobbying for the job but is opposed by the Conservative-led British government, the FT reported.

A key factor in the chances of a non-European candidate would be whether large developing countries could unite behind a single figure.

The Obama administration has not spoken publicly on this issue, beyond urging a formal interim replacement as managing director. During Strauss-Kahn’s tenure, Washington has favored some changes at the Fund that has reduced Europe’s number of seats (by two from a previous seven or nine depending on complex rotations). But that diplomacy was aimed at long-term change with a view to easing any rivalry between the G-20 and the more broadly based IMF, with its 187-nation membership.

As things stand, mathematically if the U.S. and European countries vote together, the next managing director will be European.

It is a singular opportunity to measure the state of thinking about transatlantic solidarity.


-----European Affairs