by Jack Ewing
April 17, 2013

from NYTimes Website


When Wolfgang Schäuble, the German finance minister and war horse of European politics, celebrated his 70th birthday at a theater in Berlin last September, two of the most powerful women in the world offered warm words in his honor.


Christine Lagarde, managing director of the IMF,

is a close friend of Wolfgang Schäuble, the German finance minister.


One was Chancellor Angela Merkel.

The other, delivering the keynote speech, was Christine Lagarde, the managing director of the International Monetary Fund.


Mr. Schäuble celebrated his 70th birthday last September with

Angela Merkel, center, and Ms. Lagarde at a theater in Berlin.


Ms. Lagarde’s presence reflected her close, longtime friendship with Mr. Schäuble. But it also was a confirmation of the enormous stature that Ms. Lagarde and the IMF have acquired in Europe as a result of the euro crisis.

The IMF has more say over crisis management than many Eurozone members, and Ms. Lagarde has become a quasi head of state, whose views carry more weight than those of many elected leaders. Indeed, without the IMF’s money and advice, the Eurozone might have fallen apart by now.

Because she has Mr. Schäuble’s ear and respect, Ms. Lagarde has also played an important role overcoming German reluctance to accept proposals intended to strengthen the Eurozone, like a centralized bank supervisor.

Recently, there have been signs that Ms. Lagarde is seeking to nudge Mr. Schäuble and the German leadership to moderate their views on an issue that is central to the crisis: the degree of austerity that should be imposed on countries like Greece and Portugal.

For most of the last three years, the IMF and Germany have insisted that aid recipients must cut government spending and raise taxes. But lately Ms. Lagarde has been arguing that too much austerity could be counterproductive.

A shift by the IMF would transform the debate in Europe. But the fact that the organization is so tangled in European affairs is controversial both inside and outside the Continent, and could be a source of discord as the IMF and World Bank hold their spring meetings in Washington.


The policy-making bodies of both organizations meet on Saturday, while related conferences and other events began on Monday and continue through Sunday. Poorer nations that contribute to the IMF’s financing have grumbled about having to prop up rich Europe.


More than half of the IMF’s lending goes to the Eurozone, from virtually nothing a few years ago.


The IMF has contributed about a third of the money used to rescue countries like Portugal, Ireland and Greece, with the rest coming from other Eurozone countries.

“Historically, Europe took no IMF lending,” said Guntram B. Wolff, the deputy director of Bruegel, a research organization in Brussels. “Now lending has increased since the beginning of the crisis dramatically. Is it appropriate? That is a very big question.”

Leaders and citizens of countries like Greece, Portugal and Ireland have complained bitterly about the terms that the IMF, as part of the so-called troika of technocrats along with the European Central Bank and the European Commission, has imposed in return for loans.

In addition to budget cuts and tax increases, governments have been pressured to roll back rules that protect some workers from dismissal and impose other unpopular changes. Even if the IMF is rethinking its stance on austerity, it will continue to demand strict conditions because that is the only leverage the organization has to get its money back.

Ms. Lagarde, the former finance minister of France, is perceived as less doctrinaire than the Germans, but she was at the table last month when leaders negotiated an ill-fated plan to make ordinary bank depositors help pay for a bailout in Cyprus.


Although the IMF had reservations about imposing a levy on insured depositors in Cyprus, Ms. Lagarde went along with the accord. After an outcry, the plan was revised to put the burden on large depositors.

But even those who have doubts about the IMF’s role in Europe see no alternative.


The organization will inevitably be a force in Europe for years to come, because of the money that it has lent and because of its traditional role as watchdog over the economic and budget policies of its members.

“If the IMF wasn’t participating at all, the crisis would have been worse,” said Morris Goldstein, a former deputy director of research at the IMF who is now a senior fellow at the Peterson Institute for International Economics, a research organization in Washington.

Besides the money the IMF has provided, which comes from members including the United States and Japan as well as those in Europe, the organization has played the role of outside expert, aloof from national politics.


In the absence of a strong federal government in Europe, Ms. Lagarde helps impose order on quarreling national leaders.

The IMF also helps lend legitimacy to decisions by political leaders. It is unlikely that the German Parliament would have approved the country’s contributions to Eurozone bailouts if the rescue plans had not had the IMF’s stamp of approval.

“If Europe was organized as a federal state we wouldn’t need an IMF,” Mr. Wolff of Bruegel said. “There isn’t enough trust in Europe. They prefer to have an outside player.”

Despite Ms. Lagarde’s relationship with Mr. Schäuble, which seems to be genuinely warm, she has often demonstrated her independence.


She has warned numerous times that European banks have not confronted their problem loans aggressively enough. She has prodded leaders to move more quickly to establish a central bank supervisor with more powers, and to establish a system to wind down failed banks without burdening taxpayers.

Such advice is not necessarily welcome in Germany, whose banks have their own share of troubles. German leaders have moved more slowly on centralized bank regulation than some other leaders would like.

Still, the IMF and the Germans agree more often than they disagree.

“Germany has the largest economy and the one in the best condition,” Mr. Goldstein of the Peterson Institute said. “If this is going to work, you need to get along with the Germans.”

The IMF’s power is not absolute.


When the IMF lends to troubled developing countries, its traditional function, it is typically the largest creditor with a dominant role in decision making. In Europe, the IMF is a minority creditor, with less financial clout than the European Union.


That is awkward, some IMF watchers say.

“They have to make compromises, more compromises than they would like to make,” Mr. Goldstein said. “I think that’s a problem.”

But for all the grumbling, the IMF has little choice but to remain deeply involved in European affairs.