Christine Lagarde takes the reins of the International Monetary Fund on Tuesday at a time of concern over the European debt crisis, demands for more power from developing economies, rising commodity prices and inflation pressures in economies around the world. Following are challenges Lagarde, a former French finance minister, will have to deal with in her first months as IMF managing director:
Emerging market countries have urged Lagarde not to put too much of her focus on Europe but her immediate attention will be on working with the EU to ensure Greece does not default. European finance ministers approved a 12 billion euro installment of Greece’s bailout over the weekend. The IMF has to approve its portion of the loan, which is about 3 billion euros, and its board is expected to meet on July 8. Lagarde will have her hands full negotiating a second bailout for Greece, which is likely to include additional IMF funding.
The IMF is set to release the first of several so-called spillover reports this month looking at how policies of systemically important countries affect each other. It will start with the United States. The reports are part of a broader effort to strengthen the IMF’s policing of economies. Emerging market countries have called for closer policy scrutiny by the fund of advanced economies, which have often dismissed IMF advice in the past.In the reports, the IMF will assess possible causes of the surge in private capital into emerging markets. Countries such as Brazil have blamed near-zero U.S. interest rates for fueling speculative flows that are stoking inflation.
The selection process for the managing director highlighted an imbalance of voting power at the IMF that favors advanced economies, with the United States and Europe together holding nearly 50 percent of votes. Developing nations have long called for more say in the institution. Voting reforms were approved in 2008 and 2010, but developing countries argue they did not go far enough. Lagarde will have to show early on that she heard the calls of developing countries for greater voting power, starting with ensuring that reforms agreed in 2010 are implemented. She will also have to press ahead with a review of a complex formula for calculating members’ voting shares. The aim is to simplify the methodology of the formula, which takes into account such factors as the size of an economy, trade and foreign exchange reserves.
The IMF will want to use its policy advice to help spearhead a drive against inflation as the global economy continues its recovery from the 2007-2009 financial crisis. Inflation pressures have already been on the rise, with emerging economies in particular facing pressure. The higher costs of food and fuel have hit poorer countries hard, increasing hunger and malnutrition and contributing to social unrest.
The role the IMF can play in advising governments on reforms and how to fight high unemployment will be at the forefront of Lagarde’s role in the region, which has seen mass protests that have upended governments. While the IMF has said it stands ready to help, no government in the region has requested IMF financing. Last month, Egypt decided against an IMF program after initially agreeing to one.
Lagarde is no newcomer to the G20. France is this year’s chair and as finance minister, Lagarde was at the forefront of G20 efforts to reform the international monetary system. In particular, China has been pushing for greater acceptance of the yuan, and wants to see it included in an IMF basket of currencies, including the dollar, yen, pound sterling and euro, that could serve as alternative to the dollar as a global reserve currency. The IMF has been central in providing analysis on pressing economic issues faced by the major G20 economies. Under the Mutual Assessment Programme, G20 nations will rate one another’s economic performance.
