By Josh Zumbrun and Bojan Pancevski
For seven hours, European finance ministers in a windowless room
argued over how to keep a government-debt crisis from infecting
eurozone economies, and the meeting threatened to descend into
chaos.
Then Christine Lagarde stood up to speak.
She read a proposed solution from notes she had jotted while the
others were debating, said Thomas Wieser, a senior European civil
servant who was there. "A group of ministers alternating between
screaming and mumbling, some of them not necessarily well-informed,
gradually went quiet."
The ministers, said Mr. Wieser and other participants, rallied
to Ms. Lagarde's side.
That was May 2010 in Brussels, when Ms. Lagarde was French
finance minister. The topic was how to prevent Greece's financial
crisis from threatening the eurozone's survival. The brand of
political compromise Ms. Lagarde displayed there would play out
during her tenure as the International Monetary Fund's head from
June 2011. This month, it helped her become the person tapped by
European leaders to helm the European Central Bank, the most
influential monetary-policy maker after the U.S. Federal
Reserve.
A review of her career offers hints at what kind of ECB chief
she would be. On numerous occasions, she has shown a politician's
pragmatism to the point of pivoting sharply away from some of her
own initial policy positions. In 2018, Ms. Lagarde, who once said
Greek debt was "totally unsustainable," shifted her longstanding
stance to cut a deal with European creditors that ignored the IMF
demand to restructure Athens's enormous obligations.
The ECB, unlike the IMF, has always been run by a leading
economist. Instead, the ECB is getting a political operator -- a
diplomat and negotiator, not a technocrat.
She is likely to need that pragmatism when she succeeds ECB
President Mario Draghi in November. The goal of European
integration is under strain. It will depend heavily on the central
bank's contribution to bolstering the region's wobbly economic
expansion -- including further quantitative easing -- in an era
when many populists want the world's high financial institutions to
do less, not more.
"It's a fiction to think that the ECB can be completely outside
politics, " said Giorgos Papakonstantinou, who was Greek finance
minister at the height of the crisis and worked closely with Ms.
Lagarde. "The fact that market reaction to her appointment was
positive is telling: The markets are welcoming someone with a
pragmatic stance and political agility."
Share prices in Europe and the U.S. rallied following Lagarde's
nomination as ECB president, while borrowing costs dipped across
the eurozone in expectation of continuity and renewed stimulus.
Her approach doesn't always succeed. Compromises she helped
broker between the IMF, ECB and European Union helped prevent the
eurozone from breaking up but left Greece's economy still
struggling today and the broader eurozone expansion still
sluggish.
Ms. Lagarde's reputation suffered when she supported a
much-criticized decision in the 2013 bailout of Cyprus, said
Nicolas Véron, a senior fellow with the Peterson Institute for
International Economics in Washington, D.C., a think-tank. She and
EU officials agreed to a plan by the Cypriot government to inflict
loses on bank depositors, effectively reneging on a deposit
guarantee. The nation's parliament soon overturned the decision.
"It was an inglorious episode in an otherwise admirable career,"
Mr. Véron said.
While many applaud her persuasive skills, some worry about
giving the ECB helm to someone who appears likely to continue Mr.
Draghi's expansive "whatever-it-takes" approach to policy --
including a willingness to experiment and push through
controversial change for the sake of holding the 19-member currency
bloc together. His critics, particularly in Germany, say such
efforts have hurt private banks and savers and could fuel financial
instability.
'Subtle manner'
Those who know Ms. Lagarde, 63, say she can take control of a
room and influence those in her circle -- usually technocratic men,
as she has noted -- with personal charm. "Ms. Lagarde's subtle
manner," Mr. Wieser said, "proved effective in dealing with older
men who often tried to assert themselves personally instead of
looking at the bigger picture."
A picture of the leadership style Ms. Lagarde brings to the ECB
emerges from interviews with finance ministers, a former premier,
top civil servants, central bankers, government advisers, and IMF
staff and leadership. She declined to be interviewed.
Born in Paris and educated as a lawyer, Ms. Lagarde rose through
the international law firm Baker McKenzie, working on labor,
antitrust, and mergers and acquisitions -- areas involving
contentious negotiations. In 1999, she became the first female
chairman of its global executive committee. In 2005, she joined the
French government, rising to finance minister at the dawn of the
global financial crisis.
The euro crisis began when Greece lost access to bond markets
after a collapse of fiscal discipline, triggering investor
stampedes out of eurozone countries with financial imbalances and
shaking investors' faith Europe's common currency would hold
together. Germany had initially brought the IMF into the matter to
press debtor countries to overhaul their economies.
Ms. Lagarde was the first finance minister to openly propose a
bailout for Greece in 2010, a move until then opposed by countries
including Germany. Later, she and Poul Thomsen, head of the IMF's
European department, pressured European creditors to restructure
bailout loans to Greece with easier repayment terms and debt
relief.
Ms. Lagarde won the affection of Wolfgang Schäuble, the
cantankerous German finance minister at the time. Ms. Lagarde is
known in Berlin as one of the few with whom Mr. Schäuble, a French
speaker, uses the familiar form of address that exists in German
and French.
The warm relationship continued after Ms. Lagarde took the IMF
helm and led it in rethinking its tough bailout approach. She
commissioned critical internal reviews of how the IMF became
involved in the initial Greek bailout that was failing. Creditors'
demands for budget austerity including spending cuts and tax
increases had caused an economic contraction so severe it made debt
repayment less likely and fueled the rise of populist
politicians.
Berlin grew increasingly irritated by the IMF's pressure on
European creditors to restructure Greece's debt. But she and Mr.
Schäuble maintained cordial relations.
German Chancellor Angela Merkel took an immediate liking to Ms.
Lagarde's straightforward manner early in their acquaintance, said
a person familiar with the relationship, and was impressed at how
Ms. Lagarde established herself in the male-dominated top echelons
of politics.
In 2015, when Greece's new left-wing government tried to
overthrow creditors' austerity measures, Ms. Merkel worked closely
with Ms. Lagarde to avoid a Greek exit from the eurozone. They met
at a crucial meeting in Berlin in June, along with presidents of
France, the ECB and the European Commission, to hammer out the
basis of a bailout plan that proved acceptable to Germany and
allowed Greece to muddle through.
Ms. Lagarde figured out the key to changing IMF economic
policies was identifying topics that, in IMF jargon, have
"macro-criticality" -- ones that can bring broader overall economic
results. She is widely known for speeches on topics of gender
inclusion, economic inequality, climate change and fighting
corruption. Less known is that she successfully built the case that
these topics bring broader results and must be incorporated into
bailout programs and the IMF's economic reviews.
While it was IMF economists who calculated that excluding women
from the labor market reduced potential GDP as much as 30% in some
countries, it was Ms. Lagarde who spoke out against these practices
as an "insidious conspiracy" and successfully pushed the IMF to
formally integrate metrics such as women's labor-force
participation into economic reviews.
She may not have come up with the data or idea for a policy, but
she recognized its importance, said Sean Hagan, former IMF general
counsel. "It's always the case with effective leaders that they're
not always the ones that do the initial calculation," he said, "but
they're the ones who understand that this particular strand of
thinking can be given priority. She was able to do it very
effectively."
She used her network like a politician. She answered to the IMF
executive board, representatives of 189 member countries. But if
someone on the board was skeptical of her initiatives, say former
directors, she had the relationships to go over their heads and
speak to finance ministers or heads of state.
Gerry Rice, the IMF's communications director, acknowledged that
Ms. Largarde had relationships with top politicians, but said she
preferred to make the case on its merits and find common
ground.
And Ms. Lagarde proved adept at operating in rooms of besuited
men. When the IMF's executive board first interviewed her for the
top job eight years ago, the only female director on the 24-person
board was absent, leaving her in front of 23 men. In group photos
at G-20 summits and IMF meetings, it is often Ms. Lagarde standing
out in a dark sea of suits.
"There is a lot that is attributable to personality and part of
my personality, of course, is being a woman," she told The Wall
Street Journal in 2015. "It may be, because people tend to be
territorial, men tend to be a little more territorial, so to the
extent that I'm not really a physical threat, because men don't
have to show off to me, because a man-woman relationship is of a
different nature, that helps."
She honed the art of taming unruly groups. When she chaired
meetings, she tended not to cut people off. To keep meetings moving
on the IMF's board, she allotted each director four minutes to
speak. Once they went over time, said former board members, Ms.
Lagarde began gradually tapping her microphone until they stopped,
rather than interrupting.
German sensitivities
German sensitivities will likely remain Ms. Lagarde's greatest
challenge. Germany is the eurozone's largest economy. Its political
establishment and public have been largely hostile to eurozone
bailouts and stimulus policies under Mr. Draghi. Jens Weidmann, the
German Bundesbank president, has often voted against Mr. Draghi's
policies. Ms. Merkel's designated successor, Annegret
Kramp-Karrenbauer, said in June that ECB policies were hurting
German savers.
Alexander Stubb, Finland's former premier and its finance
minister during the eurozone crisis, said the balancing act between
German sensitivities and the eurozone's demands is where Ms.
Lagarde's political astuteness will prove more relevant than
central-banking experience.
Ms. Lagarde may depart further from the traditional view that
the ECB should pursue monetary policy independently of European
political leaders who manage tax, budget, labor and other economic
policies, said Olli Rehn, Finland's central-bank governor, who sits
on the ECB board.
"But independence doesn't mean loneliness. We need both fiscal
policy and structural reforms to support stronger growth and
job-creation."
Jörg Asmussen, deputy to Germany's Mr. Schäuble during the euro
crisis and now senior executive with New York bank Lazard Ltd.,
agreed. "She may not be a monetary economist, but she is a monetary
diplomat," he said. "She is extremely charming and that is part of
her style of politics. She would hand out French pralines at 3 a.m.
during frantic ministerial meetings."
A senior EU official said there were concerns that, in putting a
politician in charge of the continent's monetary policy,
technocratic consensus could be replaced with political calculus.
The official noted the ECB's new vice president, Spain's Luis de
Guindos, was also a politician.
One hint of how Ms. Lagarde may diffuse such concern comes from
how she drew on her own technocratic deputies during her IMF
tenure. Mr. Thomsen, the IMF's Europe director and an economist,
represented her in key European meetings that required detailed
technical expertise.
Officials at the IMF, the ECB and in several European capitals
said that in her new job she will likely rely on Philip Lane, the
ECB chief economist, as she relied on Mr. Thomsen.
Mr. Asmussen, who served on the ECB executive board, said Ms.
Lagarde will be able to fall back on Mr. Lane for technical
expertise. The ability to provide continuity with Mr. Draghi's
policies -- he publicly vowed to do "whatever it takes" -- was key,
he added.
"The question whether the new ECB chief would do whatever it
takes is now answered," he said. "Yes, she will."
--Marcus Walker, Tom Fairless and Ian Talley contributed to this
article.
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com and Bojan
Pancevski at bojan.pancevski@wsj.com
(END) Dow Jones Newswires
July 18, 2019 11:37 ET (15:37 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.