Economic analysis

Christine Lagarde faces the fight of her life

Christine Lagarde is charming, powerful and the global economy’s best hope
Christine Lagarde, politician. (Marco Grob/Trunk Archive)
Christine Lagarde, politician. (Marco Grob/Trunk Archive)
Christine Lagarde. (Marco Grob/Trunk Archive)

Christine Lagarde can’t move for being mobbed. The moment she rises from her patio table at a Chinese resort hotel, she finds her path blocked by a dozen young men and women dressed in black uniforms. They are the kitchen staff of the resort in Hangzhou where she just has spent the previous few days attending the G20 summit and they want a photo with the managing director of the International Monetary Fund. Lagarde, 60, gathers them around her and obliges.

As she makes her way to the motorcade waiting to whisk her to the airport, she stops to take a photo of a small lake. Mistake. More black-clad staffers come running for more pictures of the woman—a mere public official, mind—who has 5.9 million followers on the Chinese social media site Weibo, slightly more than footballer David Beckham and six times the number who follow Apple Inc. chief executive Tim Cook.

Hotel reception now, and another group shot. Finally, Lagarde gets into the backseat of her car and departs for her next destination, Laos, but not before another throng of young workers from the hotel crowd the steps to wave goodbye—and take more photos.

Justin Trudeau, you are not the only one.

Earlier this year, Lagarde appeared on Time magazine’s annual list of the world’s 100 most influential people for the fourth time, matching the records of former presidents George W. Bush and Bill Clinton and philanthropist Bill Gates, one of the world’s richest people. Her reappointment as managing director was unopposed in February, solidifying her authority over an institution that counts 189 countries as members. As the designated lender-of-last resort for the world, Lagarde has at her disposal more than $1 trillion to help get bankrupt countries out of trouble. The list of women who wield more influence is a short one.

Lagarde has no formal training in economics and finance. She was practising law when she was recruited to join the government of Jacques Chirac as trade minister in 2005. Lagarde shone in the all-hours negotiating sessions that went on as the world’s leading financial powers battled the fallout from the collapse of American investment bank Lehman Brothers in the autumn of 2008. When the job at the IMF unexpectedly became vacant in 2011 with Greece and other European countries on the brink, German Chancellor Angela Merkel insisted Lagarde should get the job. Many were skeptical that a non-economist could manage an institution full of them. There have been slips, but for the most part Lagarde has exceeded all expectations, pushing the IMF in entirely new directions and re-establishing its place at the centre of global financial system. “She has an extraordinary ability to distill complex issues into their essence and arcane subjects into everyday language,” says Mark Carney, governor of the Bank of England. “When combined with her fearsome intellect and deft diplomatic skills, she consistently forges consensus out of discord.”

But here she is, the morning after the latest gathering of G20 leaders and other invited guests, and Lagarde cannot claim to have forged much out of the Hangzhou meeting. Speaking to Maclean’s in an exclusive interview ahead of a scheduled trip to Canada on Sept. 12, Lagarde is reflective. She’s not certain, but believes she and Merkel may be the only two people who have attended every G20 summit since George W. Bush hastily assembled the group of rich and soon-to-be-rich nations in the autumn of 2008 to tackle the financial crisis. Eight years later, with leaders offering little but talk, it’s clear the G20’s glory days are behind it.

Officials take their positions a family photo of G20 Finance Ministers and Central Bank Governors Meeting at the Pudong Shangri-la Hotel on February 27, 2016 in Shanghai, China. Finance officials from G20 member countries are meeting in Shanghai from 26 to 27 February, aiming to formulate reforms for economic growth and strengthen cooperation. (Front L-R) Germany's Federal Bundesbank Jens Weidmann, International Monetary Fund Managing Director Christine Lagarde, Organization for Economic Co-operation and Development (OECD) Secretary General Jose Angel Gurria, US Federal Reserve Board Chair Janet Yellen and British Chancellor of the Exchequer George Osborne. (Second row L-R) Indonesian Finance Minister Bambang Brodjonegoro, Bank of Indonesia Governor Agus Martowardojo, Saudi Arabia Finance Minister Ibrahim Abdulaziz Alassaf, Saudi Arabian Monetary Agency Governor Fahad Abdullah A. Almubarak and Bank of England Governor Mark Carney. (Third row L-R) Unidentified official, Bank of Japan Governor Haruhiko Kuroda, Banco Central de la Republica Argentina President Federico Sturzenegger, Central Bank of Brazil President Alexandre Tombini and Bank for International Settlements General Manager Jaime Caruana. (Rolex dela Pena/Getty Images)
Christine Lagarde and other finance officials take their positions a family photo of G20 Finance Ministers and Central Bank Governors Meeting at the Pudong Shangri-la Hotel on February 27, 2016 in Shanghai, China. (Rolex dela Pena/Getty Images)

Here’s a telling tale. At one point during the summit, Lagarde told a group of reporters that her favourite memory from the Hangzhou meeting would surely be the spectacular interpretation of Swan Lake at a gala hosted by Chinese President Xi Jinping. It was meant as a compliment, but she had come to China to warn world leaders that unless they did something meaningful soon, they may condemn their citizens to a long period of slow economic growth. In other words, she had come seeking a deal, not to be entertained. Lagarde insists her blunt remarks on the state of the economy had an impact, but not on everyone. “Some leaders said, ‘Yes, we have an issue, but I don’t see it as dark as presented by Christine,’ ” she says. “That came from countries that generally have lower unemployment rates than others, that have slightly better growth. But other leaders said, ‘Yes, that is true. We really have to respond and prepare.’ ”

That gap in leaders’ commitment to act was troubling enough in recent years as the economy repeatedly fell short of the IMF’s growth forecasts. It’s even more so now, with forces on the march that are opposed to closer global economic ties and co-operation. Protectionism and creeping nationalism aren’t new threats. The financial crisis stirred up resentment, with bankers being bailed out even as unemployment soared. But in just the last year since the G20 summit in Turkey last November, the snowball of anger and cynicism and blame has escalated dramatically. First, 13 million people voted for Donald Trump in the Republican primaries, transforming him and his isolationist policies from joke to serious White House contender. Then the shock of Brexit. Now, European countries are walking away from years of negotiations on a free-trade agreement with the United States. The Trans-Pacific Partnership (TPP), to which Canada is a signatory, is facing a similar fate: both presidential candidates, Trump and Democratic nominee Hillary Clinton, say they oppose it.

Those who pine for the boom years of the 1990s and the pre-crisis years of the 2000s forget that much of that wealth was created by surging trade in goods and services, and the better living standards it brought. Now the flow across borders is slowing, and politics threatens to make things even worse. “There is urgency,” Lagarde says. “When I see some of the language about trade agreements, I’m getting increasingly concerned.”

The G20 was created to prevent this sort of thing. But since that organization appears unable to do anything about it, Lagarde is preparing to take a stand against the Donald Trumps of the world on her own. The former lawyer, a fixture in the international business pages and a regular in publications such as Vogue, is preparing to mount a defence of globalization, the most maligned economic trend of our times. And she has chosen Canada as the place to do it during her trip through Toronto, where she’ll speak with business leaders and meet Ontario Premier Kathleen Wynne, and Ottawa, where she’ll gather with Trudeau, Finance Minister Bill Morneau and other cabinet ministers. While she says she is still working on her message to the allies of globalization, don’t be surprised if she asks for Canadian help from the protectionist mob. “Canada,” she says, “stands out as making a sensible and positive contribution to the world.”

International Monetary Fund (IMF) boss Christine Lagarde (R) chats with Canadian Prime Minister Justin Trudeau as they take part in a dialogue with world leaders at the G7 Summit in Shima in Mie prefecture on May 27, 2016. A British secession from the European Union in next month's referendum could have disastrous economic consequences, G7 leaders warned on May 27 at the close of the summit in Japan. (Stephane De Sakutin/AFP/Getty Images)
Christine Lagarde (R) chats with Canadian Prime Minister Justin Trudeau as they take part in a dialogue with world leaders at the G7 Summit in Shima in Mie prefecture on May 27, 2016. (Stephane De Sakutin/AFP/Getty Images)

Smith College is a women-only liberal arts school in Northampton, Mass. It opened in 1871 after its benefactor, Sophia Smith, used an inheritance for the “higher education of young women, with the design to furnish for my own sex means and facilities for education equal to those which are afforded now in our colleges to young men.” Among the slogans Smith uses today to lure new students: “Empower all of you!”

Lagarde, one of the most empowered women on the planet, seemed like a natural to give the commencement speech in 2014. She was the first female managing director of the IMF; the first female finance minister of France; and the first woman to lead Baker & McKenzie, one of the world’s biggest law firms. Yet hundreds of students and faculty signed an online petition calling on the school to reconsider its choice of speaker. The protest wasn’t personal, the petitioners simply refused to forgive Lagarde the perceived sins of her organization. “By selecting Ms. Lagarde as the commencement speaker, we are supporting the International Monetary Fund and thus going directly against Smith’s values to stand in unity with equality for all women, regardless of race, ethnicity or class,” the petition said.

The uproar was a blow to Lagarde—a betrayal at the hands of the sisterhood.

Unlike Canada’s Prime Minister, Lagarde doesn’t call herself a feminist. She has said she is uncomfortable with the term because of the movement’s history with men. “I think you can only make progress if that movement is inclusive and brings men together with women,” she told the Wall Street Journal in 2013.

That attitude probably helped her succeed as an outsider in a man’s world. At the G20 summit, Lagarde was one of four women sequestered with 32 men. When she chairs a meeting of the IMF’s executive board of directors, it is Lagarde and 24 members of the opposite sex. “She is comfortable chairing a board of men, but has occasionally spoken openly about her frustration that member authorities do not send women to be executive directors,” says Tom Hockin, who was Canada’s representative at the IMF for the first three years of Lagarde’s tenure.

Some women tone down their feminine sides when they walk the corridors of power. Not Lagarde, who wears Chanel and custom-made jewellery as proudly as the nerds she bosses sport ill-fitting suits and scuffed shoes. A mother of two sons, Lagarde makes a point of making time for girls and young women. Earlier this year, Morneau arranged an audience with Lagarde for his 17-year-old daughter, Clare, in Chengdu, China. (Morneau and Lagarde were at a G20 meeting of finance ministers and central bank governors, and Clare was attending an assembly of young women from G20 countries on the sidelines of the main event.) “She was mesmerized by her,” Morneau says of his daughter’s reaction to Lagarde, a former competitive synchronized swimmer who is nearly six feet tall and entirely at ease in English. “She has a style and presence that enable her to have a really big impact on the discussion,” says Morneau.

Lagarde once said that if Lehman Brothers had been called “Lehman Sisters,” the financial crisis might not have happened. She wasn’t joking. “It is an issue of diversity,” she says. One sex or the other, “tend to have common references, combined with competition, combined in this case with testosterone. I’m not suggesting it’s a toxic mix, but I’m saying it needs to be tempered and altered and modified and made better by diversity.” The Smith students’ rejection of Lagarde was odd because under her direction the IMF has been doing hardcore research on the potential economic impact of women for the first time in the institution’s history. Lagarde also plans to make bettering the lot of women a condition of receiving IMF loans, assuming improvement is warranted, as is the case with a program the fund currently is negotiating with Egypt. “Women, as the minority, have to prove their worth all the time,” she says. “We tend to overdo it because you have this anxiety to fail and let your colleague females down on occasion. I feel that responsibility.”

The IMF was created to be a force for good, but it is fair to say things went wrong along the way. For two decades, the world had known little but depression and war. Hundreds of finance officials from 44 countries spent three weeks at a mountain resort in New Hampshire in July 1944 to complete work on a global financial system with the IMF at its centre. The fund’s main job would be to keep sovereign nations from collapsing, sparing the world a repeat of the trauma that came with the Great Depression.

But the IMF doesn’t give money away for nothing. If a desperate country wants a loan, it must agree to adjust its economic policies to the fund’s specifications. In the 1980s and 1990s, that meant following the “Washington Consensus,” a catch-all term for a range of policies such as free trade and balanced budgets. So in return for a loan, countries often would have to cut or eliminate social programs, expose domestic industries to international competition and possibly raise taxes to get debt under control. The IMF’s policies caused serious social pain in countries such as Argentina and Thailand in the 1990s, inspiring mass protests at home and outside the IMF’s headquarters in Washington.

The IMF hit another low point in 2011 when its managing director, Dominique Strauss-Kahn, resigned after being charged in New York for committing several sex-related offences, including attempted rape. (All charges were eventually dropped.) There was a feeling at the time that the next head of the IMF would come from an emerging market. European countries dominate the fund with the tacit support of the largest shareholder, the United States. In return, Europe leaves the U.S. alone to choose the leader of the World Bank. That deal has become harder and harder to stomach as countries such as China and Brazil came to dwarf diminished European nations such the Netherlands and Belgium. Instead, Lagarde was rushed in as a replacement. Lagarde was popular, but not everyone was convinced she was the right person for the job. The late Jim Flaherty, Canada’s finance minister at the time, backed another candidate. “Lagarde’s selection as managing director in 2011 was a real running of roughshod over good global governance,” says Paul Blustein, a senior fellow at the Centre for International Governance Innovation and the author of several books about the IMF.

International Monetary Fund (IMF) Managing Director Christine Lagarde holds a news conference after the closing of the G20 Summit in Hangzhou, Zhejiang province, China, September 5, 2016. (China Stringer Network/Reuters)
Christine Lagarde holds a news conference after the closing of the G20 Summit in Hangzhou, Zhejiang province, China, September 5, 2016. (China Stringer Network/Reuters)

A lot has changed since then, though. Lagarde has steadily made the fund her own, winning allies in emerging markets, including China, and encouraging her world-class researchers to test dated assumptions. The deputy head of the fund’s research department, a Canadian economist called Jonathan Ostry, has published a run of papers over the past decade that disprove much of what the proponents of neoliberalism thought they knew. “We have learned that the Washington Consensus is an incomplete agenda at best, and may have got some things wrong,” Ostry told Maclean’s earlier this year. For example, a tenant of the IMF’s previous orthodoxy was that debt was bad. The research of Ostry and his co-authors has forced the institution to soften that position. If a country has lots of debt already, then yes, taking on more of it probably is a bad idea. But if a country has relatively little debt, then it can get away with running bigger deficits to invest in things that would boost the country’s productivity. This has become IMF policy, as Lagarde again in Hangzhou called on the countries that have the “fiscal space” to use it. (This shouldn’t be news to anyone who read the Liberal government’s first budget, with its forecasted $29-billion deficit and pledge that this would help jump-start lacklustre growth in this country. The document repeatedly mentions the IMF’s call for fiscal stimulus, even if Morneau himself plays down the connection. “Our agenda aligned with what she is talking about,” he says, but adds the Liberals came up with their economic program on their own.)

Lagarde has also pushed the fund to be more progressive by supporting research on the economic impact of climate change, income inequality and corruption. “I did not discover those topics,” she says. “But I have put my credibility on the line, my own accountability on the line for them and I will continue to do that. Work is not over. While we now have a good body of research and academic papers, we also need it to permeate the entire organization.”

Still, the fiasco that followed the IMF’s joint rescue of Greece with the European Commission and the European Central Bank is a black mark on Lagarde’s record. While Hockin says Lagarde was “admirably independent” throughout, a legion of critics, including Blustein, say she was too quick to defer to the European institutions. Greece needed so much money to remain solvent that the IMF had to bend its own rules to release the funds. Lagarde admits mistakes were made amid the chaos, and says they won’t be repeated—lending standards that were bent for Greece have been straightened back to their original rigidity.

Europe threatens Lagarde’s credibility and image in another important way. In July, France’s highest appeals court said she must stand trial over charges of negligence for her part in an allegedly corrupt payout of 400 million euros in 2008 to a French businessman associated with former president Nicolas Sarkozy. The trial could happen later this year. Lagarde insists she did nothing wrong and says the issue won’t be a distraction. The IMF’s executive board reviewed the court’s ruling and said it remained confident in the managing director.

If any country had wanted to punish Lagarde for her missteps—particularly emerging nations whose importance has only grown in the wake of the financial crisis—they could have done it earlier this year when Lagarde’s term expired. But the expert consensus builder had already made a point of courting those countries, especially China. In lieu of gaining a bigger share of the votes at the executive board, Lagarde created a new senior position at the fund that she filled with a Chinese official. She also has been an advocate of some of Beijing’s priorities. In October, the IMF will add the yuan to the basket of currencies it uses to set the value of its own unit of account, something called a special drawing right, or SDR. The change matters little in the real world, but it matters a great deal to China, which was eager to see its currency earn pride of place next to the U.S. dollar, the euro, the Japanese yen and the British pound. “She co-opted China very early on,” says Akshay Mathur, the director of research at Gateway House, a think tank in Mumbai that specializes in global economics and politics. “China was important in securing her candidacy.”

At the meetings in Hangzhou, Xi was the first speak, as one would expect. But the second speaker might have surprised some of the attendees: rather than one of is fellow heads of state, the chairman called on Christine Lagarde.

Lagarde was one of only three participants who held a press conference at the main media centre after the G20 summit ended on Monday, Sept. 5. In a hint of her larger plan to come, she said leaders realize anti-globalization is a threat and they must fight back by identifying to the public the “positives of trade.” That line brought out the trolls on social media. One Twitter user who goes by the name of “Mr. Sinister” dashed off this ironic interpretation of Lagarde’s remark, one of many attacks on her remarks: “Sure, you’re worse off, but your sacrifice has really helped to build an Asian middle class.”

Twitter is a poor place to sample mainstream opinion. Yet Lagarde knows she is entering a snake pit. “Cynicism resonates louder than any of the positives,” she says. “We have to take their arguments head on.” She was still working out the details of her counterattack the morning after the G20, and plans to have her thoughts in order in time for a speech hosted by the C.D. Howe Institute while she’s in Toronto. But she shared some of the ideas that will drive her defence of free trade. She says she will emphasize that globalization is the reason smartphones and tablets are affordable. Such common luxuries would be out of reach for the masses if innovators were blocked from seeking low-cost producers, or if those innovators in turn were protected from having to find innovative ways to stay ahead of international competition. She says she will also push governments to take care of those who lose their jobs or struggle to keep up with technological change. And yes, she will emphasize how globalization is responsible for lifting some 700 million Chinese and hundreds of millions of other Asians and Latin Americans and Africans out of poverty over the last few decades. Those men and women now are consumers eager to buy the fancy stuff made in North America and Europe. “That would not have have happened without trade,” she says.

Of course, the C.D. Howe Institute, Bay Street’s favourite think tank, should be a safe venue for her remarks. Outside, the reception could be different. As with other developed countries, Canada has seen massive job losses in the manufacturing sector as plants left the country in search of cheaper labour, and while most Canadians are puzzled by the Trump phenomenon in the U.S., polls show that Canadians feel less positively toward new trade deals like the Canada-EU Trade Agreement or the Trans-Pacific Partnership than they did the North American Free Trade Agreement in the 1990s.

Lagarde has her work cut out. As she made her way to Laos for another set of international meetings, CNN released a poll that put Trump ahead of Clinton. A Trump victory still remains a remote prospect: the electoral college works strongly against him. But that will provide only small comfort to Lagarde as large numbers of Americans—that bastion of free trade—continue to support a candidate who has set himself up as an opponent of “globalism.”

But Lagarde has a way with people. It was on display in 2010, when Canada hosted G7 finance ministers and central bank governors. Flaherty held the meeting in Iqaluit—in February. Most of the attendees were annoyed they were being dragged to the Arctic when they were fighting financial crises of one sort or another. But Lagarde, who was then still the French finance minister, made the most of it. She was one of the few dignitaries who ventured outside, joining her host for an inspection of igloos that locals had constructed especially for the meeting. Flaherty, who died in 2014, “always held her in very high esteem,” says Adam Chambers, one of the former finance minister’s policy advisers from the time. “She is politically astute and has incredible skill.”

Lagarde’s new mission to defend globalization against those who want it dismantled will test those skills. Iqaluit is cold. The enthusiasm for globalization in 2016 is colder.