Euro Crisis

10.16.12

The Return of Christine Lagarde, the Trillion-Dollar Woman

Christine Lagarde, head of the International Monetary Fund, is once again trying to pull Europe back from the brink.

“I got my trillion dollars,” Christine Lagarde recently told a friend with evident pride. Earlier this year, the managing director of the International Monetary Fund committed her organization to building a massive financial firewall to protect Europe’s weaker economies from rampant speculation against their debt. And that, combined with a huge infusion of cash loans at low cost and other measures by the European Central Bank, helped pull the continent back from the brink of an abyss.

With Europe stuck in the mud—or maybe the quicksand—the striking, stylish, white-haired Lagarde once again is speaking out with the unique authority of her position, and her personality. And as she looks for ways to solve the problem, she finds herself running up against the other most-powerful woman in the world, German Chancellor Angela Merkel. All of this comes against the backdrop of a looming calamity bigger than anything they’ve yet had to deal with: economic suicide by dysfunctional politicians in the United States.

At the center of the IMF-Germany debate is that perennial problem child of the European Union: Greece. During the fund’s annual meeting in Tokyo last week, Lagarde told a press conference that Athens should get two more years to meet some of the target conditions of the new €130 billion ($167 billion) bailout package. “It is sometimes better to have more time,” Lagarde said. But the next day, Merkel’s man at the meeting, German Finance Minister Wolfgang Schäuble, accused Lagarde of sending mixed signals. “When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher,” he told the Financial Times.

There may be more than a little theater involved in all this, especially with a European Union summit coming up on Thursday. (According to one source who’s attended many meetings between Lagarde and the Germans, she and Schäuble, at least, are on very good terms: “It’s almost a love fest,” the source said.) With Lagarde playing good cop and Merkel the bad, these two powerhouses may hope to keep pressure on Greece to mend its spendthrift ways, but at the same time prevent the strain from growing so extreme it drives the country deeper into ruin and out of the common European currency altogether. Merkel has recognized, however reluctantly, that austerity can’t cure all ills. The IMF is aware, of course, that growth alone cannot begin to extricate Greece from a situation in which its government debt is projected to reach almost 180 percent of its gross domestic product next year. And despite repeated predictions of imminent catastrophe, somehow this push-me-pull-you approach has kept Europe and its common currency from utter collapse.

The United States is another matter. European analysts worry that their stalled economies will be plunged into recession, or worse, if Washington does not pull back from the fiscal cliff created by Congress and the Obama administration, which can’t seem to compromise on, well, just about anything. The sudden expiration of the Bush-era tax cuts and credits would suck out what little air is left in the economy and almost certainly plunge the United States into recession. And if there is another refusal by the Republican-controlled Congress to raise the debt ceiling, which used to be almost automatic, the U.S. could see its bond ratings plunge and borrowing costs soar.

With Lagarde playing good cop and Merkel the bad, these two powerhouses may hope to keep pressure on Greece to mend its spendthrift ways.

The IMF likes to adopt wording almost as oracular and inscrutable as the Fed when it issues communiqués, and the one that came out of Tokyo in English was no exception: “In the United States, resolving the fiscal cliff, raising the debt ceiling, and making progress toward a comprehensive plan to ensure sustainability are essential.” But in the French version, in Lagarde’s native language, there was no doubt about the force of her opinions: it was “imperative” to find a way to avoid the cliff, “raise the debt ceiling, and move ahead with a vast plan to assure the viability of the budget.”

Washington may not be listening right now. But whoever wins the elections in November will have to answer to the trillion-dollar woman and the common sense she represents. It is, after all, about time.