Mohamed El-Erian

By Mohamed El-Erian
The opinions expressed are his own.

Eager to retain a historical but outmoded entitlement, European politicians seem to be coalescing around Christine Lagarde to replace Dominique Strauss-Kahn as Managing Director of the IMF. Lagarde has the qualifications to successfully lead a multilateral institution that is central to the well being of the global economy. Her ability to do so, however, may critically depend on how she is appointed.

Lagarde has considerable skills and expertise; she has gained important experience in both the private and public sectors; and, judging from her stint as France’s Minister of Finance, she has navigated well the corridors of political power at the national and European levels.

Lagarde would be the first woman to lead a Bretton Woods institution. Such an overdue appointment would send an important message to an IMF demoralized by disturbing allegations of sexual assault by Strauss-Kahn. It would also come at a time when delicate questions are being raised as to whether the institution has historically been tolerant of inappropriate behavior.

Yet Lagarde's appointment would be controversial, not because of her qualifications but because of the circumstances. Regrettably, her name has emerged in the context of a vocal desire by European politicians to extend a feudalistic tradition that is both outmoded and harmful -- that of having one of their nationals, and only their nationals, at the helm of the IMF.

This tradition is rightly opposed around the world. After all, merit rather than nationality should be the guiding principle for a critical multilateral post. And there are many non-Europeans that deserve very serious consideration, be they Africans, Asians, Latin Americans or North Americans.

It has not helped that European politicians have resorted to silly excuses to justify the appointment of yet another of their nationals. Consider the often-cited argument that this is needed because the IMF is heavily involved in resolving the region’s peripheral debt crisis.

Such a view was never cited when the epicenter of the crises were in Asia or in Latin America; nor were they mentioned when the IMF stepped up its involvement in Africa. And rightly so. Indeed, it was viewed as a sign of strength that the head of the IMF was not from the part of the world in turmoil.

Also remember that the post of Managing Director carries a five-year term. So, are European politicians telling us that the turmoil in their region will persist for that long? And can they assure us that no other part of the world will experience systemic dislocations during that time?

Citing the urgency of the appointment is also feeble. Yes, the IMF runs like an army and, as such, the loss of its general can be destabilizing. Yes, the global economy is in the midst of major national and global realignments. But the IMF is also an institution with talented staff and deep institutional roots. Speed should not trump legitimacy when it comes to a new head.

The fact is that Europe is keen to maintain control. It is allowing an obsession with control and national prestige to dominate the spirit and requirements of multilateralism. Meanwhile, the US does not appear counter as it is in no rush to give up its historical entitlement to the number two position at the IMF (and also the presidency of the World Bank).

To the disappointment of many, it looks like yet another opportunity will be missed to establish an important element of legitimacy for the IMF. While highly unfortunate, all is not lost however. In this second best world, it would be in everyone’s interest to find a way to reconcile Lagarde’s qualifications for the job with the unfortunate context for her potential appointment. And there is a way.

Instead of a new five-year term, Lagarde should be appointed just to complete Strauss-Kahn’s term that runs until 2012. During this period, Lagarde would be charged to lead the IMF’s Executive Board to put in place a selection process that is open to all nationalities, transparent and merit-based -- or the minimum standard of governance for an institution that is owned by 187 member countries and charged to serve them under the principle of “uniformity of treatment.”

Of course, come next year, Lagarde would be eligible to stand for a full term in an election that is open to all; and one that is based on merit rather than misplaced notions of national prestige and harmful political horse-trading. 

If my assessment of her qualifications is correct, she would be well placed to secure the necessary global support under a process that is credible and long, long overdue.

Mohamed El-Erian is CEO of PIMCO. He spent 15 years at the IMF (1983-2007) and his name was mentioned in connection with potential candidates to replace Mr. Strauss Kahn. On Tuesday, he indicated that he has no interest in pursuing the post.

Photo: From L-R, France's Budget, Civil Service and Government Minister Francois Baroin, Finance and Economy Minister Christine Lagarde and Interior Minister Claude Gueant attend the questions to the government session at the National Assembly in Paris May 11, 2011. REUTERS/Charles Platiau

By Mohamed A. El-Erian
The opinions expressed are his own.

This weekend's detention of the IMF's chief on allegations of sexual assault has implications that go well beyond the impact on Dominique Strauss-Kahn's (or, as he is commonly known, DSK) international prestige. They could also impact the IMF, France, market uncertainty and the well-being of the global economy.

We must wait to make a full assessment until we know the outcome of ongoing police investigations into allegations that, according to his lawyer, DSK intends to “contest vigorously.” Having said that, some commentators are already taking the view that the IMF could lose its managing director, and that France could lose a leading candidate for next year's presidential elections.

Should he be forced to step down, DSK would be the third successive head of the IMF to leave suddenly. Once again, this would catch the institution with a selection process for the top position that is still overly dominated by politics, horse-trading between Europe and the US and other outmoded characteristics.

The IMF, whose shareholders are 187 member countries, would have two choices if it has to replace DSK quickly: Retain its feudalistic approach, or implement an open merit-based selection process based on clear criteria and a transparent process.

The first would allow the Fund to move quickly in appointing a new head, but doing so uses a method that lacks credibility and legitimacy. The second would correct a long-standing deficiency, but slow the appointment.

Under either approach, the IMF would inevitably operate under a huge cloud. This would erode the confidence of an institution that, under the personal authority of DSK, has taken significant financial and reputational risk in making loans to countries whose medium-term debt viability is far from robust. It would undermine its effectiveness in responding to new challenges. And it would pull the rug from under initiatives aimed at enabling it to play a more effective role in global policy coordination and, more generally, in improving global economic governance and filling a damaging vacuum at the center of the international monetary system.

The IMF's loss, if it were to occur, would also be a blow to the socialist party in France. DSK was widely anticipated to seek his party's nomination for the presidential race; and polls suggested that he would have been well placed to challenge President Sarkozy’s pursuit of a second term.

France now faces the possibility of an even more complex, and a more polarizing presidential campaign. This would come at a time when the country heads both the G-8 and G-20, and when it plays a stabilizing role at the center of Europe now that the Merkel-led government in Germany, the other large economy at the core of the region, is facing growing political strains.

Undoubtedly, there are countries that are, and should be wondering about the impact that all this could have on them. Greece is first among them.

Desperate to avoid a debt restructuring, Greece is heavily dependent on exceptional official assistance. Up to now, a DSK-led IMF has shown little hesitation in aligning itself with a controversial European approach that uses liquidity to address a solvency problem — essentially, piling new debt on top of Greece's already excessive debt.

A possible DSK departure from the IMF would make the institution less enthusiastic for an approach that has already shown signs of slippage, ineffectiveness and overall fatigue. Should this materialize, the ECB and EU would find it extremely difficult to continue to pursue a course that is shifting dubious liabilities from private creditors to European tax payers yet failing to deliver to Greece either the reality or the promise of economic growth and jobs. In the process, market uncertainty will grow as the probability of debt restructurings also increases in the two other peripheral economies needing large bail outs (Ireland and Portugal).

The allegations facing DSK are serious and will -- and should -- take time to be investigated properly and sorted out. In the meantime, and unfortunately for the wellbeing of the global economy, they have caught the IMF still without a proper selection process, and Europe still without a sustainable solution to the debt crisis in its periphery.

Mohamed A. El-Erian is the CEO and co-CIO of PIMCO, and author of “When Markets Collide.”

Editor’s note: Some news stories have mentioned El-Erian as a possible candidate to run the IMF.

Photo: A man stands behind front pages of newspapers about International Monetary Fund (IMF) chief Dominique Strauss-Kahn's arrest, at a central Athens kiosk May 16, 2011. Strauss-Kahn makes his first appearance in court on Monday since being accused of trying to rape a hotel maid in a case that sent shockwaves through French politics and left the IMF in turmoil. REUTERS/John Kolesidis