Christine Lagarde has taken the top helm at the International Monetary Fund (IMF) at one of the worst times in the Fund's history and this is not in reference to the widely publicized sex scandal and rape charges against former managing director Dominique Strauss-Kahn. Lagarde, the IMF's first female managing director and first non-economist to take the directorship, will have to put a number of items on the top of her agenda at a key time when the IMF has serious reputation damage.
Perhaps the most public task before Lagarde is to address the continued risk of European sovereign debt default and the feeble future of the eurozone. Of no less importance, but a key item that has been lost from the public eye, is the challenge of improving the IMF's reputation in the emerging market economies. To achieve the latter, Lagarde will need to fulfill longstanding promises and G20 commitments to put in place governance reforms. On top of both of these large tasks before her, Lagarde needs to do more to improve countries' confidence in the IMF's ability to contain and predict the kinds of financial and economic crises that have continued to challenge the international financial system for over two decades.
Without doubt, Lagarde will take the looming crisis in Europe to heart but can she remove her continental blinders to see the structural weaknesses of the Greek economy and the inherent policy gaps in a common currency? In moving forward, particularly if, and some would argue that this is a matter of when, can she remain objective when eurozone countries pull away from the euro? The IMF would have been naturally called into advise members in such a circumstance, but will the organization be a welcoming place under Lagarde's stewardship? Those who opposed Lagarde's candidacy as IMF managing director had pointed out these inherent conflicts of interest and questioned Lagarde's ability to keep an objective view on how to move Europe out of its current crisis. This will undoubtedly be a serious test for Lagarde and analysts will be closely watching to see if Lagarde continues her tough stance against Greece and other European members on the verge of default.
While Europe may remain a key interest of Lagarde, she must look back into recent Fund history and help mend the international financial institution's troubled relationship with emerging market economies. A few years before the international financial crisis, many emerging market economies made bold statements about how they would never return to the IMF for financing again. It was believed then that the IMF's reputation had reached rock bottom. Fast forward to today and the IMF has done little to actually improve its reputation among many of the key emerging market economies. Throughout Lagarde's so-called campaign tour in emerging market economies, she identified this crisis of confidence and noted her desire to improve bilateral relationships. Beyond the obvious politicking, Lagarde surely realizes that the future of IMF financing will come from the emerging market economies.
To tame the fires in Europe with IMF funds, she will need the emerging market economies who are holding much of the world's surplus capital to have faith in the organization's ability to devise appropriate policies, to understand the reasons behind these continued economic crises, and to better predict fault lines and prevent contagion in the global economy. While a number of capitals in emerging market economies have argued that this requires the IMF to transfer decision making power to rising economies -- most notably through shifting IMF quotas and giving an added number of IMF Executive Board seats to emerging market economies to countries like Brazil, China, Turkey, and others - there will be a lot more fundamental and internal reform before Lagarde. Arguably, the IMF will require a serious "IMF rethink" of how things are done. Clearly the IMF's current toolkit has been inadequate and Lagarde may be bold enough to address the serious challenges of existing staff paradigms. As a lawyer, she may just bring a fresh perspective into how the organization can change and move beyond the narrow prism of neoclassical macroeconomic analysis of what are increasingly integrated political economy problems plaguing the global economy.
Lagarde has a full plate of issues to address, but hopefully she will overcome her Eurocentric perspective and realize the interrelated nature of challenges before the IMF: fixing Europe, repairing IMF reputation, and freshening IMF analysis.