Goldman Aligns Itself Against US, UK, And Europe, Alongside China In Choice For Next IMF Head

Christine Lagarde's chances of heading the IMF just took a another step back. Why? Because the firm whose alumni are about to be or already are in key posts at the Fed, the ECB and the BOC, has said (through its moutpiece Jim O'Neill who "can't see how the EUR should be above 1.40" even as Thomas Stolper et al see it going to 1.55 in a year) that it is not too crazy about having a European replacement for DSK, and that "it might be better if some leadership and authority came from outside of Europe with a fresh set of independent eyes" (supposedly the fact that Lagarde has had no formaly economic academic brainwashing is not a factor). In other words, Goldman has aligned itself with China, which has made it clear that it may be wise if the next IMF leadership "reflected the New World Order." As such, the largely symbolic IMF conclave just became very interesting: while the IMF is largely a figurehead with the real backstop organization always being the Federal Reserve, Goldman appears to have just voted alongside China... and thus against Europe and the US.

From Goldman's Jim O'Neill:


Two weeks ago at a conference in Singapore, when asked to make some bold predictions about the future, I joked that the next head of the IMF would be Sir Alex Ferguson. Little did I know that within a week of that joke, the Fund would need a new leader.

I have been discussing the possible candidates for the new Head with many people this week, as have many others. The new leader should satisfy two broad criteria. One, he or she must be well versed in the many economic and policy issues that the IMF must handle and lead. Two, he or she must have a personality that can engage successfully with the many different members to orchestrate change as well as a better and more balanced world economy.  What the leader mustn’t be is simply a figurehead of a pure European and US “deal” to sustain the historic arrangement that the IMF always has a European leader and the World Bank has an American leader. If the IMF ends up with European leader, that person will have to face the additional burden of being regarded as such a product, adding to his or her challenges.

As is being discussed in the media, a number of candidates from the “Growth Market” world are in the mix, with names from Brazil, China, India, Mexico and Turkey being considered. From the developed world, the name of Christine Lagarde is dominant and she appears to be the favourite right now. The IMF has said they will find a new Head by the end of June.

A number of commentators are suggesting that, given the European debt crisis and the challenges facing European Monetary Union, the leader must come from Europe. This strikes me as a rather ridiculous argument on two fronts. First, if this were a critical factor in the decision, it would suggest that we should have had a Latin leader in the 1980’s and an Asian head in the late 1990’s. Furthermore, it implies that every time there is a country at the centre of a global crisis, its Finance Minister should become the head of the IMF. Second, I believe the exact opposite could be the case. In fact, to really solve the EMU crisis, it might be better if some leadership and authority came from outside of Europe with a fresh set of independent eyes.


The void at the IMF comes at a time when the IMF is needed to help move the crisis onto a sounder footing. It seems as though Europe’s leaders are already struggling, and the loss of Strauss Kahn is seen as an additional blow. Whether this is because of his personal expert knowledge or because he had the ear of German Chancellor Merkel is unclear, but he probably had both. Whether either of these two qualities is specifically helpful is more questionable.

At the core of the EMU problem are the difficulties facing German leaders concerning leadership. In my judgment, the EMU crisis is more one of governance and leadership and not really a sovereign debt crisis. As should be better known, the GDP-weighted average debt and deficit position of the Euro Area compares favourably with both the UK and US, and is considerably better than Japan. Each of Ireland, Greece and Portugal has current debts that on their own seem very problematic, and both Spain and Italy could be troubling. But remember, Belgium and Italy joined EMU in 1999 with debt levels of more than 100 pct of GDP, and this didn’t stop them from being allowed to join the system.

The problem for the Club Med countries is that, post the global credit crisis, investors are much more nervous about what they will and won’t invest in, and the current European position looks troubling. What appears to be now blatantly clear is that too many countries were allowed to join in 1999 and, as many skeptics have argued, it is not an optimal currency area. It is easy for me to offer this observation, but it is not easy for either the leaders of those countries  or Germany, or the EU, to change it. Removing any of them from EMU now could lead to a lot of unpredictable outcomes. This might not make life any easier for them or the remaining members, especially in the near term. At the other extreme, making the troubled countries more optimal members of the single currency might require not only a lot of adjustment pains, but also more of a true pan European world of rules and regulations, especially in terms of underlying fiscal tools and political decision making. This is really the choice facing Europe’s leaders, and it is not one any of them seem to be currently prepared to make. By default – pardon the unfortunate word – they are simply trying to persuade the world that “everything will be alright in the end.”


I continue to believe that without more severe contagion through the financial markets, the global importance of the troubled Club Med countries is much less than many believe. As I show at many speeches I give, 8 of the 10 most likely contributors to global GDP in the current decade will be so-called emerging economies. The combined GDP of these eight “Growth Economies,” Brazil, Russia, India and China (the four BRICs) as well as Korea, Indonesia, Mexico and Turkey, will increase by more than 5 times that of the Euro Area. And, by the end of the decade, their collective GDP will probably be bigger than the Euro Area. What happens to all of these countries will be much more important globally than what happens in the Euro Area.

If the Growth Eight were part of a regional club as is the EU, in my opinion it would seem a straightforward choice that the new IMF leader should come from one of their countries. Perhaps they should try to decide on a jointly preferredcandidate rather than each one promoting their own.

Of course, one country, China, stands at the heart of the Growth Eight’s prospects, and they alone will contribute half of their decade’s GDP change. In principle, China should have a big say about the IMF’s future. As I am also fond of showing, last year increases in China’s imports ($400 bn) were more than the size of Greece’s total economy. What happens to China’s imports in the coming years is a lot more important the issue of Greek debt.

But does this mean that the new head of the IMF should be Chinese? At a Goldman Sachs BRIC conference early last week, a client asked me whether I thought it would be appropriate for the new head of the IMF to come from a nondemocratic country. This was an extremely good and difficult question. My answer wasn’t very popular with fellow panelists or I suspect much of the Western audience. I suggested that citizens of China and Russia don’t seem to be too disturbed about not being democracies; they want a better standard of living and more wealth. What system of political structure delivers that seems less important. As it relates to the IMF, it is not a requirement to be a democracy to be a member, so it doesn’t strike me as though its leader necessarily needs to come from a democratic country. What an effective leader of the IMF needs to be is someone who understands the complex changing structure of the world, which involves both democracies and those which are not. It requires someone with strong leadership skills and vision. Perhaps my joke in Singapore might be worth exploring!

Jim O’Neill

Chairman, Goldman Sachs Asset Management