The Lagarde Consensus

IMF chief Christine Lagarde on the global economy's "new mediocre"—and why women are better leaders than men.

Fernando Sancho

The 1990s was the era of the Washington Consensus—a suite of reforms, including privatization and open trade, that the World Bank, International Monetary Fund (IMF), and U.S. Treasury Department urged governments around the world to adopt for their economies to prosper. That consensus has vanished with financial crashes in countries such as Mexico and Russia, the 2008 financial crisis, and the general disappearance of consensus in this politically fractured world.

But a new, narrower consensus has emerged: When politicians, business titans, journalists, and colleagues describe Christine Lagarde, the head of the IMF since 2011, they tend to use the same words—words like “smart,” “charming,” “tough,” “attractive,” and “ambitious.” She is often mentioned, along with German Chancellor Angela Merkel and U.S. Federal Reserve Chair Janet Yellen, as one of the most powerful women in the world.

When I met with Lagarde last week in her office at the IMF’s headquarters in Washington, she was wearing a red dress that stood out in Washington’s grayscale corridors of power, and began the conversation by offering me a date (the fruit). I read her a list of attributes commonly ascribed to her and asked if she agreed with the Lagarde Consensus.

“I am not sure about ‘ambitious,’” she quickly replied. “Look where you are!” I responded, recalling how fiercely she had lobbied countries for the votes she needed to be appointed managing director of the IMF. “If I am intelligent or attractive is for others to judge, but I am reacting to the ambitious part because I find it strikingly wrong,” insisted the 59-year-old Lagarde, a former lawyer and top government official in France. She added that she also doesn’t feel all that powerful. “I wish I was,” she said, “because if I was then I could reduce unemployment, I could create conditions for growth, I could bring more common sense in rooms where there is too much testosterone and big egos.”

* * *

I asked Lagarde whether the world has entered into a prolonged period of slow economic growth—what economists call “secular stagnation.” She said that she prefers to describe the situation as the “new mediocre,” and explained that global economic growth over the past two years, and again this year, has averaged about 3.5 percent—the same average rate at which the world economy has grown over the last two decades. What has changed, Lagarde noted with concern, is the nature of that growth: “It is not creating the jobs that are needed and job creation is spread out in a way that does not respond to the needs. It is also not sufficiently boosting productivity and, surprisingly, emerging markets, which have the potential to grow at a much faster pace, are not doing so.”

When I asked if inadequate growth is related to the austerity programs adopted in many countries after the 2008 financial crisis, Lagarde argued that the debate between economic austerity and growth is a false one. “They are not mutually exclusive. You can have fiscal discipline and strong growth,” she said. The pragmatic reconciling of what others see as irreconcilable is another element of the Lagarde Consensus.

Lagarde takes a similar stance on economic inequality, a subject that has rarely topped the IMF’s agenda in the past. She has fixed the organization’s attention on the issue, and is especially interested in how the policies that the IMF recommends affect women. I asked if she agreed with the French economist Thomas Piketty, who posits that growing economic inequality is driven by forces deeply embedded in the capitalist system. “I am one of those who believes that the capitalist system leaves enough room for innovation and who values the forces of markets, but within a regulatory environment that provides governments the tools to respond to inequality,” she responded. What’s the primary cause of this inequality: freer trade, technological advancements, the financial system, government policies that favor the rich? “Technology,” she said, “but also finance, which concentrates vast resources on a small group. And I would also add culture as a factor. Especially when culture limits opportunities for women. And corruption, of course.”

Her reference to the world of finance reminded me of a scene I had witnessed at the World Economic Forum in Davos, when the global financial crisis was at its worst and she was serving as France’s finance minister. Several of the world’s top bankers took the floor to congratulate her on the job she was doing. Lagarde brusquely asked them to stop applauding her and instead do their job and lend again. Credit needed to start flowing to stimulate the economy, but the banks, reluctant to take risks in such an uncertain environment, had effectively stopped lending and made the situation even worse. When I recounted this moment, she smiled and nodded. “Yes, I know. I didn’t make any friends that day.”

She said it bothered her that the burdens of the financial crisis have fallen disproportionately on the backs of the poor and middle class rather than the bankers and financiers who made many of the decisions at the root of the crash. But she claimed that this dynamic is changing, referencing new regulatory institutions and stricter capital requirements and government supervision for the financial sector in the United States and Europe: “Before, when a bank got in trouble and needed to be bailed out, it was done with taxpayers’ money. Now we have created a system that puts the burden on the shareholders of the financial institutions that get in trouble.”

Is the global financial system now safer than it was before 2008? “Yes. Governments now have the legal grounds, the reach, and the authority to act more effectively,” she said. Does the high concentration of financial assets in a few large institutions worry her? “Yes, for two reasons. As a young lawyer I was trained in competition law and I learned that concentration limits competition—and that is a bad thing. My second concern is that, having been in management positions, I think that organizations that grow very large and complicated become exceedingly difficult to manage and can also become unaccountable.”

* * *

Lagarde has been criticized for being both too soft and too tough in her dealings with debt-strapped Greece, which last Thursday met a deadline to partially repay an IMF loan. For instance, Paulo Nogueira Batista, a Brazilian member of the IMF’s board, recently argued that the organization’s credibility has been damaged by its response to Greece’s economic crisis, noting that IMF “rules were bent and broken to suit the needs of the euro area.”

Lagarde strongly disagreed with Nogueira Batista’s analysis. “The statements of this gentleman that you refer to are inaccurate,” she said. “They are very biased and not based on facts. … We studied … the fiscal adjustments that we demanded in different countries and discovered that the volume and the nature of the effort expected of the Europeans was more than what we expected from the Middle East, for example; from countries like Jordan, Tunisia, or Morocco.”

I met with Lagarde just days before Greece made its payment to the IMF. Yanis Varoufakis, Greece’s finance minister, had just told journalists that Greece “intends to meet all obligations to all its creditors, ad infinitum.” Did she believe that? “I only believe the statement that he made to me. And that is that Greece is going to honor the payment that is due this week.” Lagarde sidestepped discussion of the long-term—the ad- infinitum—outlook for Greece, but she did admit that she is concerned about the medium-term prospects for the Greek economy. Remedying the situation will require cooperation among the parties and goodwill, she said, “and there is plenty of that on our side.”

In the past, Lagarde has not hidden her frustration with Angela Merkel’s reluctance to act more aggressively to stimulate Europe’s beleaguered economies. Lagarde attributes this reluctance less to Merkel’s ideology than to a “mindset that’s very common among German taxpayers.” She listed the advantages that Germany has gained from European integration—from the euro to freer mobility of labor—and maintained that these factors have boosted its export-based economy. Wages in Germany have gone up, she noted optimistically, which means that the labor costs of its exports will be more aligned with those elsewhere in Europe. She also welcomed Germany’s recent investments in infrastructure, pointing out that German public investment has been significantly lower than in other European countries.

But, beyond Greece and Germany, is the European project structurally flawed? Can a continent with a single currency shared by nations with economies that remain far too fragmented, each with its own regulations and fiscal policies, be stable? “You are describing the past,” Lagarde countered, arguing that following the financial crisis the “European project is stronger than ever.”

Many Europeans—buffeted by stubbornly high unemployment, mounting inequality, crumbling social safety nets, and escalating social tensions—would likely read that assessment and ask what world Lagarde is living in, I observed.

“I know all that,” she responded. “I was talking about the European project, not about the progress. That project is now more consolidated, stronger, and has better defenses. Does this mean that conditions for growth and prosperity have been enhanced? Not yet. But a lot has been done in the monetary and fiscal areas. And there is still a lot to do in terms of structural reforms; especially investments in infrastructure. These two levers—structural reforms and infrastructure investments—are absolutely necessary to stimulate growth, but policymakers have not used them as much as they should.”

* * *

Policymakers have also not done enough, according to Lagarde, to bring women into positions of power. She has made clear her disappointment that 23 of the 24 members of the IMF’s board of directors are men. “I can’t do anything about that as they are appointed by their respective governments, but I am happy that among the senior staff of the Fund there are now many women,” she explained.

For Lagarde, appointing women to positions of authority is not just a matter of fairness. She genuinely believes that women tend to manage power better than men. And she hasn’t been afraid to say so publicly. I read her some of what she has said on the record about this issue: women are more inclusive managers and are more inclined to create consensus; they are better leaders in times of crisis; they are better at managing risks and juggling tasks; they pay more attention to detail and at the same time have a more holistic view of life.

Aren’t these positions sexist? I asked.

“No, it’s the truth,” she replied, without missing a beat. “It’s something that I have witnessed myself in my professional life, whether as a lawyer, a manager of a large international institution, a finance minister, or as the managing director of the IMF. And I’m also trying to encourage others to actually test women and give them the opportunity to lead, because they can do it—and well.”

But how long will Lagarde herself lead the IMF? I noted that her last three predecessors at the institution all left the job before completing their terms. Horst Kohler departed to become Germany’s president, only to later be forced to resign that post. Rodrigo Rato left to work in Spain's financial sector and was later entangled in legal proceedings, while Dominique Strauss-Khan stepped down after becoming embroiled in a sex scandal. Is there a pattern here? I inquired. Lagarde paused, then answered firmly: “I intend to finish my term.”

This post has been adapted from Moisés Naím’s interview with Christine Lagarde for the Leading European Newspaper Alliance (LENA).