Time for Change at the IMF

The Greek crisis has made it painfully clear that the International Monetary Fund (IMF) needs a change at the top -- and that the U.S. must use its privileged position as the IMF's biggest contributor to insist on it.

Over the last month of debt negotiations with the Greek government, the IMF's Managing Director, French politician Christine Lagarde, has emerged as a hard-liner who has pursued an austerity agenda that even her own staff economists believe damaging. Last Thursday, over the objections of the Europeans but with American support, the IMF released an assessment of the Greek crisis, a draft Debt Sustainability Analysis showing that further austerity would undermine Greece's ability to return to growth. The report's contested release revealed a house divided, with IMF staff critical of the agenda for which Lagarde has been a leading spokesperson.

Time and again, Lagarde has been intransigent in negotiations with the current Greek government, arguably the most hawkish of the "Troika" representing Greece's creditors -- the IMF, the European Commission and the European Central Bank. The unsurprising result was that Greece was pushed last week into "arrears" with the IMF, a polite term for default. Greece's failure to make an interest payment on its IMF debt is the first time in the institution's history that a developed country has defaulted.

This isn't just Greece's problem. Debt crises and debt defaults are always the joint product of a lender and creditor. The IMF was designed to help avoid them, by serving as a global lender of last resort. But under Lagarde's leadership, it has become part of the problem, exacerbating the economic crisis in Greece -- with predictable results in today's resounding referendum vote against further austerity measures.

Like many other members of the European governmental elite, Lagarde strongly hinted that her aim in taking this tough line was regime change: the substitution of the currently elected Greek government by a successor. Of course, this is not remotely within her mandate as the head of an international institution charged with providing financial assistance and technical advice to its members. Indeed, in pursuing this agenda, Lagarde has deviated from longstanding IMF protocols, neglected the advice of her own staff experts, and possibly violated IMF rules. But it does reflect Lagarde's priorities as a former French finance minister as well as a close ally and personal friend of German finance minister Wolfgang Schäuble.

Now more than ever, after today's referendum showed a large majority of the country rejecting the Troika's terms, Greece needs a credible and generous partner in the IMF. It needs to renew negotiations about desperately needed debt restructuring and to have a better range of options put on the table for it to be restored to growth, whether inside or outside the Eurozone. The IMF is best positioned to be that negotiating partner, since both the European Commission and European Central Bank have narrower mandates and more immediate imperatives that drive their positions. But there is no reason to think this will happen so long as Lagarde remains at the helm.

Lagarde's credibility was already damaged before the Greek crisis became acute. She has been dogged by a persistent scandal from before her time as head of the IMF, when she allegedly helped swing a major arbitral award in favor of a politically connected businessman. Beyond her checkered past, however, her handling of the Greek crisis makes it clear Lagarde must go. She has proven unable or unwilling to run the IMF as an international institution, charged with a global mission, and instead made it a handmaiden to the aims of Brussels and Berlin.

Lagarde's position expires next year and should not be renewed. But Greece cannot wait for her successor to arrive. The Troika needs to find ways to forgive Greek debt and restore the country to growth. Lagarde has shown herself to be an obstacle in this process.

The difficulty for the IMF -- this year or the next -- will be finding a successor who does not share Lagarde's biases. Traditionally, the IMF has been headed by a European, while its sister institution, the World Bank, has been headed by an American. The arrangement is long-standing and dates back to the creation of these institutions as pillars of the post-war economic order. If this traditional division of labor within the North Atlantic world is to be maintained, the IMF will have to find another establishment figure from Europe to put at the helm. And it seems likely that any other insider from the Continent's intertwined financial and governmental elite will share Lagarde's outlook -- in particular, a tendency to view debt crises in Europe through a narrow lens, worried about the fate of the Euro and excessively sensitive to the imperatives of Brussels and Berlin. Indeed, it was exceptional lending to Greece by Lagarde's predecessor, the French politician Dominique Strauss-Kahn in 2010--justified by the necessity of keeping Greece in the Euro but without debt restructuring--that has helped push Europe to this brink.

It doesn't have to be this way. It is past time for the IMF to be headed by someone from outside Europe who would focus on a broader agenda of growth, development, and international equity. At the time of the IMF's conception in 1944, the world had far fewer states than it does now. The vast majority of today's African and Asian countries were then European colonies, and the members of the Soviet bloc were unwilling or unable to join these Western-led institutions. Divvying up control of the Bank and the Fund between the Americans and the Europeans reflected the geopolitical realities of that time. But it doesn't reflect the geopolitical realities of today, nor of an IMF with 188 member countries.

When Lagarde goes, the United States should use its influence to push for a new Managing Director from one of the developing world's massive democratic states, such as India, Brazil, Indonesia, or South Africa. Such a leader would bring a much-needed outside perspective to an institution now tainted by the division within Europe. Indeed, as many developing countries have suffered under earlier IMF austerity programs, someone with first-hand experience of debt crises would prove especially valuable. After all, the Greek tragedy is neither the beginning nor the end of Europe's problems, given the structural misalignments that its project of monetary union has laid bare.

Two weeks ago, while cutting off further dialogue with Greece, Lagarde is reported to have sneered that further negotiations required "adults in the room." Perhaps a start should be made with the IMF's Managing Director herself.


David Singh Grewal is an Associate Professor at Yale Law School.