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Lagarde Takes Lead of IMF at Key Moment for Global Economy

June 28, 2011 at 12:00 AM EDT
France's Christine Lagarde was named the new head of the International Monetary Fund at a critical time for that organization and for the global economy. Judy Woodruff discusses what kind of challenges she faces with Cornell University's Esward Prasad and George Washington University's Scheherazade Rehman.
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JUDY WOODRUFF: We explore the pick of Christine Lagarde to head the IMF and the challenges she will face in office with Eswar Prasad. He’s a former IMF official who’s now at Cornell University — he’s also a senior fellow at the Brookings Institution — and Scheherazade Rehman, director of the European Union Research Center and professor of international finance at George Washington University.

It’s good to have you both back with us again.

Eswar, let me begin with you.

Remind us, what does the International Monetary Fund do? And what’s the job of its director?

ESWAR PRASAD, Cornell University: So, the International Monetary Fund does two things.

One, it lends money to countries in trouble. But, more importantly in the new world economy, what it does is, it tells countries what they should be doing with their policies. It evaluates their financial systems. It evaluates their policies, talks about whether those policies are good for the country, but, more importantly, also for the global economy, what is, somewhat strangely, called surveillance.

And that’s a key function. And this is where the IMF managing director role becomes very important, because, of course, the technical staff of the fund are very qualified. They can evaluate policies. They can come up with good judgments. But, ultimately, the managing director has to take very important policy decisions.

So, when the IMF goes out and tells a big country like the U.S. or China what is wrong with its policies, you need somebody who can stand up to these big powers, tell them what they’re not doing right, and be willing to take the heat. So, it’s a very important job.

JUDY WOODRUFF: So, Scheherazade, why was she chosen?

SCHEHERAZADE REHMAN, George Washington University: Well, I think that it’s irrelevant that she is the very best candidate. What’s more relevant that she is the right choice for right now.

In the middle of a crisis rule, number one, you don’t make a crisis worse when you hire a new leader. Number two, she also happens to be what we call the rock star of central bankers in IMF and sort of international finance ministers. It’s quite an uncolorful group, and she stands out. The media loves her.

JUDY WOODRUFF: Because she’s a woman?

SCHEHERAZADE REHMAN: She’s a woman, and she has charisma. And the market influence is there.

And that’s very — it’s a very handy tool these days to have when the media does listen to you and takes advantage — and you can take advantage of that. And, lastly, in the aftermath of a scandal, this is no better time than to have the first female director of the IMF.

JUDY WOODRUFF: Did she have any strikes against her? What — or did she have any negatives going into this contest, Eswar?

ESWAR PRASAD: The process, I think, is what people have not liked.

And there was a sense that the big powers, Europe and the U.S., had agreed that the emerging markets would have a fair shot at the job. They didn’t have a fair shot because Europe claimed the job up front and garnered a lot of support, including from the U.S.

The other issue is how she will treat the European debt crisis, which is going to be the first problem that lands on her plate. There is a question whether she can actually act, as the head of the IMF, as an independent, objective party, rather than come into the job with the baggage that she now has, having been the French finance minister.

JUDY WOODRUFF: So, Scheherazade, it was felt that — by the countries that supported her that she would be able to do that?

SCHEHERAZADE REHMAN: She will actually be able to do the job. But the strikes that are against her are twofold.

Well, one, she’s French. And there’s been a longstanding, as Eswar said, move that perhaps a non-European should be running the IMF. But the timing is all off. We have a Greek crisis on our hands. The U.S. pushed very hard for this because our view is this. We want the Europeans to fix the Greek problem. We want it to go away. And we want them to do it quickly.

JUDY WOODRUFF: We being?

SCHEHERAZADE REHMAN: The United States.

Unfortunately, Lagarde is part of the old crew that was managing this crisis for the last 18 months. And — and it’s been mangled — It’s been mangled. We were sitting here a year ago and this was the beginning of a crisis. And it’s escalated. It hasn’t bedded down in any way whatsoever. So she’s part of that.

JUDY WOODRUFF: So, why wasn’t that a knock on her?

SCHEHERAZADE REHMAN: Because we are — the United States — from the United States’ point of view, we want the Greece crisis solved. And she can do it. The IMF has a lot of influence in this process.

JUDY WOODRUFF: So, what — that’s her immediate challenge, Eswar, correct? What does she need to do in the near term to get that resolved?

I mean, there’s something in motion right now. They’re taking votes in Greece, which will determine whether they get this money that they need right away.

ESWAR PRASAD: The real problem in Europe, as was just mentioned, is that there hasn’t been unified forces within Europe to come up with a common platform.

There’s been a tremendous amount of dissension within Europe itself. We have seen that play out in the pages of newspapers in terms of public statements. And that’s not helping markets very much. I think what the IMF needs to force the Europeans to do is to come up with a unified position, but, more importantly, recognize the reality of the situation.

Number one, restructuring is going to be needed sooner or later. Second, private financing is not going to happen. Once this reality is recognized, then we can figure out how to deal with the Greek debt crisis in a way that it doesn’t spill over into other countries and cause a much bigger problem.

But I think Europe is still not fully recognizing these realities or doesn’t have the political will to deal with them.

JUDY WOODRUFF: So, how is it expected, Scheherazade, she’s going to go about changing minds in the rest…

SCHEHERAZADE REHMAN: Very delicately, because you have to understand that there is this issue of perceived objectivity in all of this.

There’s a large number of French banks which are exposed to the Greek crisis. There’s a lot of other things happening. She has in the past opposed a full restructuring, where the IMF believes that a restructuring must happen. And now she is going to have to — going to do a U-turn. And this is going to be a little bit of fancy footwork on her part to be able to sort of pull this off.

JUDY WOODRUFF: What are — what — what specifically, though, Eswar, is she going to need to do in the coming weeks? Because Greek — Greece — everybody believes — or the perception is that Greece is on the precipice right now, that decisions have to be taken very quickly.

ESWAR PRASAD: There is an all-important vote coming up tomorrow, of course, to see how Greece itself is going to deal with this issue.

But even if the vote is positive in terms of the government agreeing to undertake reforms and there being majority support in Parliament, the question is whether the streets of Greece are going to remain calm at the end of this and accept this.

The second issue is how Europe actually comes on board in terms of this plan, because the plan that has just been floated by France, in fact, is essentially going to require a restructuring of the debt. But this is not quite going to be enough in terms of the overall package. So, basically, as an independent and objective observer, which she would be as the head of the IMF, I think she’s got to make a commitment, or she’s got to get the Europeans to make the commitment to the IMF and to the international community that Europe will stand behind Greece and is willing to guarantee some of these debts, because I think that’s really inevitable, given the circumstances right now.

JUDY WOODRUFF: Will she get, Scheherazade, some sort of presumption of success because she’s new on the job and because this needs to happen? Or how do you see that?

SCHEHERAZADE REHMAN: Well, she understands the situation intimately. And that helps enormously.

But I think, with the IMF now behind her, she can use her newfound power to push the Germans to a better compromise, because the Germans are the ones that are pushing very hard for the austerity packages and the privatization that the Greeks are now on the streets rioting about.

And I think some kind of compromise is much more likely now in a much speedier fashion with her at the helm of the IMF.

JUDY WOODRUFF: How do you see her longer-term challenges, once this immediate crisis is behind her?

SCHEHERAZADE REHMAN: I think we — the — we know that she is going to be able to manage the European crisis. It’s how she manages the rest of the world, Asia, the BRIC countries, in terms of what comes down the road with other sovereign debt crises or currency crises down the road.

JUDY WOODRUFF: And how do you see that in terms of her long-term challenges, Eswar?

ESWAR PRASAD: So, the big long-term challenge for her is to again bring the emerging markets back on board, because there are two things that have convinced the emerging markets once again that it is a U.S.- and Europe-led institution and one that looks to the interests of those parties, the selection process that has resulted in her winning the post, and in addition the way Greece is being treated.

So, she really needs to rebuild the trust of the emerging markets and convince them that they have a serious stake in the institution. And there is a way to do it. Number one is to carry on what her predecessor did, which is put in place some reforms.

JUDY WOODRUFF: Strauss-Kahn.

ESWAR PRASAD: Strauss-Kahn — to put in place some reforms that give the emerging markets more voting rights, more representation.

That has been agreed upon. It needs to be pushed forward expeditiously. But, second, she can put in place a process to make sure that happens without political battles in the future and ensure a more orderly and more competitive succession for her successor.

JUDY WOODRUFF: And, Scheherazade, given what happened with Strauss-Kahn, how much damage has been done to the IMF, at this time when so many seem to be looking to the IMF to solve these problems?

SCHEHERAZADE REHMAN: I think the IMF is — is embarrassed.

And the view from the outside markets are — is that they’re slightly distracted, because they haven’t had anybody at the helm right now. But now, with her coming in, I think that will be taken away. She will garner the limelight. She will lead them through the crisis.

And, you know, my — I would add one more thing about her future role in the IMF. Perhaps the IMF’s ability to give us a red flag about future crises before they happen, as opposed to during and after — and the IMF has really not been on the top of its game when it comes to identifying crises well in advance.

JUDY WOODRUFF: Are you referring to Greece, or…

SCHEHERAZADE REHMAN: I’m referring to the United States.

JUDY WOODRUFF: Ah. Well, hitting home.

SCHEHERAZADE REHMAN: That’s right.

JUDY WOODRUFF: Scheherazade Rehman, Eswar Prasad, we thank you both.

SCHEHERAZADE REHMAN: Thank you.

ESWAR PRASAD: Pleasure.