If Europe Wins the IMF Election, Europe Could Lose

The contest for the managing director post at the IMF has become a duel between Christine Lagarde, France's Minister of Finance, and Agustin Carstens, the head of Mexico's central bank. Lagarde is favored. Since the IMF was founded at the end of World War II, its top position has always been held by a European. Its international finance counterpart, the World Bank, has traditionally been headed by an American. Thus, the Allies in World War II divided the financial world, circa 1945.

Now, things have changed. The emerging markets members of the IMF are growing restless. They fear that Lagarde will be too Euro-centric in dealing with the European sovereign debt crisis, allowing the borrowers to control the lender. Many support Carstens with the hope of maintaining international balance. Since the emerging markets members are growing much faster than the European members, their influence is on the rise.

If Lagarde wins, the commitment of emerging markets members to the IMF could weaken just at the time the world needs strong international financial institutions. If Carstens wins, reality is that he would probably have to assist weak European nations to about the same extent as would Lagarde. The major banks of the world evidently have a great deal of exposure to the European sovereign debt morass, and the IMF, even if headed by a Mexican, would have little choice but to ride to the rescue. Such an IMF could do so with much less risk of offending emerging markets nations. And if Carstens would impose tougher conditions than Lagarde, that might be a good thing, as the European Union is by all appearances a one-trick dog that can only kick the can farther down the road.

The IMF is one of the few means by which emerging market powers like China, Brazil, India, South Korea and others provide aid to Europe. Having per capita income levels much lower than Europe's, the emerging markets nations can offer Europeans little or no direct aid lest they rile up their own citizenry. If their commitment to the IMF sags, its capacity to lend to needy nations could diminish.

The U.S. is in the hot seat. It likely has the voting power (16%) to turn the election one way or the other. America has deep financial and economic ties to Europe. Even though the Euro is a rival to the dollar, America would be deeply affected by any European financial crisis. But America's austerity driven politics today preclude any direct bailout. There won't be a 21st Century Marshall Plan. The IMF, indeed, is one of the few ways America can assist Europe. The smart play might be for the U.S. to support Carstens. After all, China holds trillions of U.S. dollar denominated securities. Brazil has recently been a fairly significant buyer of U.S. Treasuries. A rift with emerging markets nations is hardly in America's interests. We might soon need a bailout ourselves, and if so, it won't come from Europe.