The nomination of Christine Lagarde to become the next president of the European Central Bank means that the International Monetary Fund needs a new leader. Historically, the post has gone to a European, the result of a postwar gentlemen’s agreement among trans-Atlantic leaders that the head of the IMF would be a European while the head of the World Bank would be an American. The last time the deal was challenged — a year ago, when the head of the World Bank stepped down — tradition prevailed and David Malpass, a former U.S. Treasury official, assumed the post. Europe is likely to retain its grip on the IMF, but it is time to reconsider that agreement.
Lagarde was named managing director of the IMF in 2011 when Dominique Strauss-Kahn, then the institution’s head, was forced to step down over a sex scandal. She had stints in French Cabinets, serving as minister of finance, of commerce, and of agriculture and fisheries. Her tenure is widely considered to have been a success, having helped navigate the Greek financial crisis and maintaining the IMF’s credibility at a time of increasing strain in global finance. The fact that she is a woman has also been helpful, putting a face on and providing momentum to the global effort to empower women.
The campaign to succeed Lagarde will not begin until after she is confirmed as ECB president, which will likely occur this fall. Officially, nationality is irrelevant and the process will be “open, merit-based and transparent.” Candidates will be nominated to replace her and the 24-member executive board will create a shortlist of three to interview before deciding.
While the contest is months away, contenders are already emerging, including Mark Carney, governor of the Bank of England; Tharman Shanmugaratnam, chairman of the International Monetary and Financial Committee; Kristalina Georgieva, World Bank chief executive; Agustin Carstens, former deputy managing director of the IMF; George Osborne, former British chancellor; and Raghuram Rajan, former Reserve Bank of India governor.
While all are qualified, each has issues. Carney is a Canadian citizen (although he also has an Irish passport), is serving in a country that will soon leave the European Union — raising questions about whether Europe would back him — and is thought to harbor political ambitions in Canada. Osborne faces the same questions about his ties to Europe; his record in office raises even more compelling issues. Neither Shanmugaratnam, Rajan nor Carstens is European. Georgieva has a formidable CV as an international finance civil servant, but she comes from Eastern Europe and it is not clear if Europe will rally behind her. International betting markets have Carney the favorite, followed closely by Rajan.
The most important question is whether the gentlemen’s agreement will endure. The selection of Malpass would seem to validate the deal, but U.S. President Donald Trump’s disregard for most international norms and his disdain for Europeans could upend expectations. Emerging economies could unite and press one of their candidates, and Shanmugaratnam, Rajan and Carstens could do the job. But those countries have long been reluctant to do that since they rely more heavily on the IMF and do not wish to prejudice future considerations.
It may be time for them to abandon that reticence. Emerging economies play increasingly vital roles in the global economy and the informal agreement that has determined the IMF and World Bank leadership reflects a bygone era. Nationality should not be the most important factor in the selection process; skills should be.
Whoever gets the post will face real challenges. The global economy is slowing and strains are increasing as liquidity mounts, protectionist winds grow stronger and several countries face crisis: A short list includes Argentina, Venezuela and Turkey. China is experiencing economic difficulties and most observers anticipate a U.S. downturn in the next year or two. The Trump administration has shown disdain for international institutions in general and the emergence of new international financial institutions like the Asian Infrastructure Investment Bank will compound the difficulties of modernizing the IMF and adapting to a new global environment. Some fear the IMF will need to raise new capital from member states after recent loans to Argentina. It is a full plate that demands both economic and diplomatic skills.
Japan does not have a dog in this fight, although it might be concerned about the preservation of norms, since a Japanese has headed the Asian Development Bank since it was founded. If the agreement over the World Bank and the IMF breaks down, Japan’s lock on the leadership of the ADB might be next. Japan does have a stake in ensuring that the global financial order’s core institutions are ready for the next crisis — an event that is certain to occur at some point in the future.