The Trials of IMF Power Player Christine Lagarde

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Christine Lagarde, Managing Director of the International Monetary Fund, in her office in Washington, D.C., December 15, 2015. As manager of a trillion-dollar fund, Lagarde is arguably one of the most powerful people in the... Lexey Swall/GRAIN for Newsweek

Christine Lagarde, arguably the most powerful woman in the world, is six months away from the end of her term as managing director of the trillion-dollar International Monetary Fund (IMF), but when she talks about the organization it's clear she considers her work unfinished. "What I would like to see going forward in the institution is it being more agile, having the ability to harness development and leverage the knowledge which we have in this organization—which is huge—and make it available to members," Lagarde says, during a recent interview with Newsweek at her office in downtown Washington, D.C. She describes her time at the IMF as "a roller coaster" but adds, "I am available [for a second term] if the membership decides so." The membership is the 24 directors who make up the executive board that chooses the IMF's managing director.

A lot of powerful people want her to stay. In October, U.K. finance minister George Osborne tweeted: "Delighted to support Lagarde for another term as head of IMF. She is—in both the English and French meaning of the word—'formidable.'" Many think Lagarde has helped keep the world economy on track in a very difficult period and steered the IMF toward a more activist approach to issues like gender equality, public health and the refugee crisis in the Middle East, Africa and Europe. If she wants a second term, they say, the world would be lucky to have her.

But two days after her interview with Newsweek, Lagarde received some unwelcome news from Paris, the city in which she was born—news that could help bring a swift end to her hopes for a second term, permanently damage her reputation and put her in prison for a year. On December 17, the Court of Justice of the Republic ordered Lagarde to stand trial on a charge of negligence relating to her alleged involvement in a financial scandal that has dogged her since 2011.

In September, France's prosecutor-general, Jean-Claude Marin, recommended that the court drop the charge against Lagarde, but it ruled otherwise. Lagarde responded to requests for comment about the case through a spokesman, saying: "I have instructed my lawyers to appeal this decision, which I consider to be totally unfounded."

The court's ruling is not the only challenge to Lagarde securing a second-term. Representatives from powerful emerging economies—the so-called BRICS nations of Brazil, Russia, India, China and South Africa—say it is time one of their own led the fund. (Many developing economies also object to the tradition of an American always leading the World Bank.)

Even in Europe, Lagarde's antagonists are growing in number. Greece and its allies have criticized the IMF's handling of that country's sovereign debt crisis, saying it should not have intervened and that its early recommendations were unduly harsh on ordinary Greek citizens. In a study released in 2013, the IMF admitted it had underestimated the effect its recommendations of austerity would have on the Greek economy.

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Lagarde’s friendship with the German Chancellor Angela Merkel has earned her the scorn of many Greeks, who see her as a key figure in their debt crisis. Lexey Swall/GRAIN for Newsweek

The emerging economies and Europe's increasingly popular leftists—on December 20, the left-wing Podemos party finished third in the Spanish general election and could yet help for a coalition government—portray Lagarde as a cloistered member of the European elite, concerned primarily with preserving the dominant capitalist system and bolstering the rich and powerful.

Her supporters say this grossly misrepresents a woman who has used much of her time in office to help the dispossessed and disempowered through actions that are not strictly part of the IMF's mandate. It is disingenuous, they say, to argue that the managing director of the IMF should not do all she can to keep the global economy as stable as possible; capitalism is the dominant economic model in the world, her supporters say, and it is her job to make sure it works as well as it can.

This argument will continue should Lagarde win a second term. If she doesn't, the fund has indicated that it will find a different sort of leader to replace her. David Lipton, the IMF's second-in-command, said in July 2015 that once Lagarde steps aside, her successor is likely to be a non-European and that the person's appointment will be "strictly merit-based."

The charges against Lagarde relate to a financial scandal known in France as L'Affaire Tapie. In 1993, French businessman Bernard Tapie sold his majority stake in the sportswear brand Adidas in order to join the Cabinet of former socialist President François Mitterrand as minister for urban affairs.

Tapie claimed that the then state-owned bank Crédit Lyonnais had mishandled the sale, and he sued them. The legal dispute ran until 2007 when Tapie switched political sides and began backing the conservative Nicolas Sarkozy, who beat Ségolène Royal in the French presidential election in 2007.

In 2007, Lagarde, who served as Sarkozy's finance minister, approved the members of an arbitration panel that investigated the dispute between Tapie and the bank. A year later, the three-member panel went on to award Tapie $435 million in compensation. Critics accused the Sarkozy government of giving favorable treatment to one of its supporters, and the court of appeal launched an investigation. On December 3, 2015, after years of legal wranglings, the Paris court of appeals ordered Tapie to return the cash, with interest.

The Case Against

Lagarde's legal woes are not the first for a managing director of the fund. Fellow French national Dominique Strauss-Kahn was forced to resign in 2011 after a hotel maid in New York City alleged that he raped her. (Lawyers settled out of court for an undisclosed sum.) The director before Strauss-Kahn, the Spaniard Rodrigo Rato, was arrested in April 2015, seven years after leaving the fund, on charges of tax evasion and money-laundering with regards to his personal finances. His case is ongoing.

The Tapie case has become a convenient tool for critics who say that Lagarde—born into a well-to-do family to a mother who taught Latin, Greek and French literature, and a father who was a professor of English literature—favors the wealthy and the privileged. Her tenure as finance minister in a politically conservative government is another mark against her for Europe's leftists.

There is probably no population in Europe less fond of Lagarde than the Greeks. The IMF entered the Greek debt negotiations back in 2010 at the request of the Greek government and quickly became unpopular in the cash-strapped country. The initial bailout the fund suggested, which came with a package of pension cuts, wage freezes and tax increases, resulted in Greece losing a quarter of its aggregate income, said Domenico Lombardi, a former executive board member at the IMF.

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Lagarde has recently come under fire, potentially jepordizing her chances at a second term as IMF leader. On December 17, the Court of Justice of the Republic ordered Lagarde to stand trial on a charge... Lexey Swall/GRAIN for Newsweek

Lagarde defends the IMF's role in the crisis. "For some people to say the IMF should not have been involved, I say let's look at the facts and the numbers and the threats that we had to the financial stability of the global economy at the time," she says. "I don't think it would cross anyone's mind that in 2010 we should not have supported Greece and we should not have responded to their request to the IMF to have support." At the time, this request was met with horror among opposition politicians, among them the current left-wing Prime Minister Alexis Tsipras, who worried publicly that the IMF would implement harsh cost-cutting measures.

When Lagarde took over as managing director, the IMF was already unpopular in Greece. She may not have helped its reputation when, soon after beginning her tenure, she gave an interview during which she said that ordinary Greeks were "trying to escape tax all the time."

In riposte, many Greeks pointed to her annual tax-free salary of $467,940 and tax-free allowance of $83,760. The remark about tax-dodging, they said, showed that she didn't care about Greece's problems and that she was out of touch with the financial challenges facing its citizens.

Lagarde also insisted that Greece needed to make significant reforms to its labor and pension markets to reduce its high levels of debt. Though she has also advocated debt relief for Athens, many Greeks say they no longer trust her to represent their interests.

Tsipras said in December that the IMF's position on fiscal and financial issues was "unconstructive" and that from now on Greece's bailout program should be handled by European countries and organizations only. Tsipras has made it clear that he wants Greece to handle its debt crisis; as the leader of a country that's part of the eurozone Tsipras cannot be rid of the European Commission or European Central Bank, but he can try to push the IMF out of the troika—a term for the de facto alliance formed by the three groups in the crisis.

A former Greek finance official, who asked to remain anonymous because he says he intends to publish his own account of the financial crisis, has few kind words for Lagarde. "Lagarde has two hats—one is head of the IMF and one is that of a European politician who has not lost all ambition to return to the political scene in Paris, to run for president." In 2012, Lagarde laughed such suggestions off, saying, "Presidential ambition is not an illness you catch in Washington," a nod to Strauss-Kahn, who intended to run for president once he left the IMF. That second hat, the official added, is at odds with her current position and causes her to advocate policies for Greece that favor Europe's big political players.

Lagarde's friendship with the German Chancellor Angela Merkel—another figure of scorn for many Greeks for her role in the debt crisis—further cements the impression among many Greeks that Lagarde is part of a Western European elite. (The pair regularly call and text each other about policy issues. Lagarde says she and Merkel also exchange small gifts from time to time. "[Merkel] is a music aficionado, and so am I," she says. "She very often gives me CDs—beautiful recordings of music.")

Lagarde's approach to the Greek crisis provoked some criticism from within the IMF as well. Paulo Nogueira Batista Jr., a former member of the IMF executive board who left in June 2015 to represent Brazil as vice president of the New Development Bank—an organization that the BRICS nations operate as an alternative to the Western-led IMF and World Bank—told Newsweek he felt conditions the IMF imposed on Greece were unduly harsh. In protest, he abstained from two votes on the debt crisis during board meetings and once left his seat empty in frustration at how the fund was managing the crisis with what he felt was little compassion for the indebted nation.

But economists like Batista have another criticism of Lagarde's directorship—and that criticism speaks directly to who she is rather than what she has done. "She is the 11th European in a row to run the IMF—it is an outdated position to reserve the managing directorship for a European," Batista says. "If the IMF wants to be a 21st-century institution, it needs to have a truly merit-based system without this geographical preference. It cannot go on reserving the number one position for a European national." He says that a representative from one of the BRICS countries should lead the fund.

Friends in High Places

Lagarde's critics know that they're probably outgunned. When Newsweek arranged the interview with Lagarde, her office suggested a call with the U.S. Treasury Secretary Jack Lew, one of her many powerful supporters. He spoke about her in glowing terms. "She can work through night after night and in the morning still approach both issues and people in a way that keeps them engaged and interested," he says.

Not only does she have influential supporters in the United States and Europe—the world's two biggest economies, if Europe is taken as a bloc—but she has developed good relations with China. In 2011, she made Zhu Min, a former deputy governor of the People's Bank of China, a deputy managing director at the IMF. He was the first Chinese person to hold such a senior role.

On November 30, the IMF added China's yuan to its basket of reserve currencies, joining the U.S. dollar, the British pound, the euro and the Japanese yen. A mixture of these currencies make up the IMF's loan payments to countries such as Greece. The yuan's inclusion indicates the IMF believes China's currency to be both strong and stable. Lagarde has also suggested that one day the IMF might relocate from Washington, D.C., to Beijing.

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Lagarde is expected at this month’s World Economic Forum (WEF) annual meeting in Davos, Switzerland, a gathering of economists, business leaders and political figures. She is expected to meet with leaders to discuss ways to... Lexey Swall/GRAIN for Newsweek

To her critics, these moves are more examples of her comforting the comfortable. But her allies say she uses her power and influence in other ways. José Viñals, who serves as Lagarde's financial counselor and director of the monetary and capital markets department at the IMF, says his boss goes out of her way to promote young women and gender equality.

He recalled a cocktail party in 2014 in Santiago, Chile, at which a group of 15-to-16-year-old high school girls were helping out. "The first thing [Lagarde] does, she goes to the girls, and she spends five minutes speaking to them," Viñals says. "And then she says, 'Come, I'm going to introduce you.'" Lagarde took the girls to meet the assembled dignitaries, telling them that they could talk to Viñals about economics, if they wanted.

When she took over the fund, Lagarde gave much more attention to the issue of gender inequality. In October, the IMF released a report titled, "Catalyst for Change: Empowering Women and Tackling Income Inequality." It found that reducing gender inequality by 0.1 percent (as measured by the U.N.'s Gender Inequality Index), led to economic growth by almost 1 percent. The results were not particularly surprising or original but the paper showed the fund's commitment to addressing the problem.

Lagarde downplays her role in the fund's increased efforts in addressing gender inequality. "I think I was facilitating a process that was already underway," she says. "Our economists are curious by nature, and when they identify a critical issue…they want to understand [it] better." But, she adds, "I probably gave the visibility that was needed to encourage some to nose around and to see what else, besides the purely fiscal, could matter."

Lagarde has also involved the IMF in humanitarian crises in ways that are new to the institution. When the refugee crisis began, the IMF, which is not mandated to give aid, had to find more creative methods to help out in the crisis. In Jordan, for example, where the IMF already has a financial program to help and advise the government on economic policy, the fund, Lagarde says, "has brought into the program much more flexibility to take into account the fact that [Jordan is] spending money on refugees, to take into account the fact that they have refugee camps and massive infrastructure drains on the economy." The IMF also relaxed Jordan's deadlines for its fiscal targets and adjusted other elements of the program such as financial disbursements.

The refugee crisis is the second major emergency Lagarde has led the IMF through. When the Ebola epidemic began in West Africa in 2014, medical aid agencies began sending staff to the region. Given that the epidemic was primarily a health emergency, the IMF, Lagarde says, had no real cause to get involved. But Lagarde decided the fund should intervene. "We harnessed the goodwill in this institution, we put our thinking hats on and found all available trust funds that we had that could be re-engineered in order to address that situation," she says. "We were the first one to put cash in the banks so that [the governments of Liberia, Guinea and Sierra Leone] could pay doctors, nurses and people in order to address the disease."

With the Ebola epidemic largely over, Lagarde is hoping the fund will respond to future emergencies in a similar way. But her time for developing the fund's involvement in humanitarian missions may be fast running out.

Lagarde is expected at this month's World Economic Forum (WEF) annual meeting in Davos, Switzerland, a gathering of economists, business leaders and political figures. The goal of the meeting is, in the words of WEF founder and executive chairman Klaus Schwab, to improve the state of the world. But as the delegates discuss the threats facing political stability and the global economy in 2016, they will know that one of their most powerful colleagues has a very personal battle ahead of her in the coming months: fighting for her career—and her freedom.

Uncommon Knowledge

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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.

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