IMF is almost within Lagarde's grasp

ANALYSIS:The French finance minister's campaign is relying on manoeuvring in Europe to succeed

SHORTLY AFTER he secured election as managing director of the International Monetary Fund after a campaign tour of emerging economic powers in 2007, Dominique Strauss-Kahn remarked he would probably be the last European to lead the fund. As recently as mid-May, after Strauss-Kahn resigned to fight allegations of attempted rape, the Élysée Palace was saying it was unlikely France could install one of its own in a post that has gone to a Frenchman four times since 1945.

Just a month later, and with two weeks to go before the fund’s board decides on the succession, Strauss-Kahn’s compatriot Christine Lagarde – now in the final stages of her own extensive tour of emerging powers – is virtually certain to succeed him and become the first woman to lead the agency. How has she managed it?

Lagarde’s name was circulating in Paris as a possible replacement for Strauss-Kahn even before his arrest in New York. Strauss-Kahn had been widely expected to step down this month to declare his candidacy for the Socialist Party’s presidential primary and, with major European capitals keen to keep a European in the post as they battled the euro zone’s debt crisis, the popular, respected French finance minister was emerging as one of the favourites.

Lagarde’s campaign owes its momentum in large part to Europe’s rapid and united diplomatic manoeuvring to install her as its agreed candidate.

European endorsements for Lagarde came in quick succession, and by the time she finally declared she already had the support of Berlin, London, Rome and other capitals.

Since her campaign began, Lagarde has been criss-crossing the globe, pressing her credentials and trying to assuage misgivings among emerging powers over the tradition that has seen the top job at the fund go to a European since its creation after the second World War.

In the past three weeks she has been to Brazil, China, India, Russia, Saudi Arabia and Egypt, and has attended the annual meeting of the African Development Bank in Lisbon.

The content of the discussions she had held has remained private, but developing states’ demands for more power at the fund are assumed to have dominated.

During his four years at the helm, Strauss-Kahn oversaw a shift in voting power that gave emerging markets greater input at the fund and made a notable gesture by naming a Chinese special adviser.

Giving emerging economies a bigger role would require agreement on a simpler methodology for calculating members’ voting power and would inevitably come at the expense of smaller European countries (Belgium carries more weight at the fund than Turkey, whose economy is about three times bigger).

Institutional reforms under Strauss-Kahn’s leadership were largely aimed at boosting China’s voting power, but countries such as India, Russia and Brazil are also seeking more clout at the fund.

Emerging economies also want more fund lending instruments designed for their needs, including a short-term liquidity facility that countries with sound economic policies could access when global credit markets are under strain.

Furthermore, China and others have long criticised the fund for not being even-handed when it comes to rich states, which all too often dismiss advice from the fund.

Lagarde has made soothing noises wherever she has gone. In Beijing, she echoed Chinese concerns and committed herself to “the principle of an open, transparent candidacy” based only on merit, and “independent of nationality”.

It would be “very logical and probably desirable” for Zhu Min – Strauss-Kahn’s special adviser – to be involved at the highest levels at the fund, she said.

In Delhi, Lagarde told journalists that if she were elected, “a small part” of her “would become Indian” and reiterated that her nationality was “neither an asset nor a handicap”. In Brasilia, she situated herself as the candidate who would resume the reform programme initiated by Strauss-Kahn.

An important moment in Lagarde’s campaign occurred in her absence, when G8 leaders gathered in Deauville at the end of May. Until then, neither Russia nor the US had given much indication of their positions. Afterwards, Russian prime minister Vladimir Putin described Lagarde as a “serious” candidate who was “completely acceptable”, while French foreign minister Alain Juppé claimed G8 leaders were “unanimous” in their support of his cabinet colleague.

That would all but clinch it for Lagarde. Between them, the G8 states control 47.75 per cent of the votes at the fund. Add to that the constituency composed of Austria, Belgium, the Czech Republic, Hungary, Luxembourg, Slovakia, Slovenia and Turkey (a total of 4.88 per cent of votes) and the Nordic countries (3.4 per cent), and Lagarde would already have a comfortable majority.

While western support would ensure her election, she also needs votes from emerging powers to cement her legitimacy in the post. China, India and Brazil have been non-committal in public, but Lagarde has already received declarations of support from Egypt, Qatar, the United Arab Emirates, Morocco, Bahrain and other countries.

She appears to have the backing of Indonesia, the most populous Muslim state, judging by a personal endorsement by finance minister Agus Martowardojo.

Voting rights are not the only issues that have been up for discussion.

Saudi Arabia’s finance minister Ibrahim Alassaf, who met Lagarde in Jeddah, identified the sovereign debt crisis and the fund’s role in restoring stability as his main concerns.

In a gesture apparently aimed at Egypt, Lagarde said the fund under her leadership would participate “as closely as possible” in supporting countries affected by the uprisings in the Arab world.

In addition to her own attributes as a candidate and the momentum she gained through Europe’s united stance, Lagarde has benefitted from the inability of emerging economies to agree to an alternative candidate.

Her sole opponent is Agustín Carstens, the experienced and respected governor of Mexico’s central bank. Carstens has a deeper grounding in economics than Lagarde (she is a lawyer by training), as well as experience of working at the fund.

He too has been energetically touring world capitals seeking support, but he has acknowledged Lagarde’s chances of winning are “quite high” and indicated he put his name forward in an effort to help emerging market states to secure the post in the future.

“We emerging markets might take more than one round to get to the final position, but if we don’t start at some point, we will never get there,” he said.

Carstens believes he has the backing of 12 Latin American countries, but the region’s biggest economy may well elude him given Brasilia’s wariness of Mexico’s close relationship with the US.

“I’m not fooling myself,” Carstens said in Washington last week. “It’s like starting a soccer game with a 5-0 score.”

The fund’s board will meet both candidates in Washington in the coming fortnight, with a decision due by June 30th.