I have intimate knowledge of Eurozone, Lagarde says

London: A candidate from Europe, but not a European candidate. When Christine Lagarde, French finance minister, declared on Wednesday that she would run for the managing directorship of the International Monetary Fund, the distinction she drew between her nationality and her suitability was worthy of Descartes.

While Europeans have held the IMF's managing directorship since the its launch in 1947, Lagarde was quick to reject the idea of a nationality test. "I am not basing my candidacy on the fact that I am European," she said. "My intimate knowledge of the European community, of the Eurozone and its leaders, can help a bit but it should not be a plus on which my candidacy should be based."

Indeed, the IMF's involvement in increasingly controversial crisis lending programmes in Greece and Ireland — and now in Portugal — could prove a disadvantage to Lagarde's candidacy. Though she is the clear favourite to succeed Dominique Strauss-Kahn following his spectacular exit, the question of European dominance of the fund is a substantive rather than symbolic issue for the first time in living memory.

Michel Camdessus, a French career bureaucrat, served as IMF managing director between 1987 and 2000. Yet much of the fund's intellectual direction during the defining crises of the 1990s was set by Stan Fischer, Camdessus's American first deputy managing director (now governor of the Bank of Israel), and by US Treasury secretaries Robert Rubin and Larry Summers.

"As the biggest single shareholder, the US has exercised a great deal of influence," Mandeng says. "The power held by the EU has not been translated into the dominant view of the institution." Europeans have frequently complained that the US Treasury on Washington's 15th Street — just four blocks from the fund's 19th Street headquarters — exercises undue influence over IMF policies. Although the US holds only 17 per cent of votes on the board, its greater determination and intellectual confidence has usually prevailed.

During the 1990s, the IMF developed a standard operating procedure of issuing large rescue loans contingent on extensive "conditionality" — generally including tight fiscal policy, widespread privatisation and other structural reform. The approach contrasted with the instincts of Germany, for example, which pushed for stricter limits on lending to prevent "moral hazard" in borrower countries. Facing the first of a series of capital market crises, the IMF and US put together a rescue package of almost $50 billion for Mexico in 1995. The fund's part of the lending was pushed through over the objections of Germany and other European governments, which abstained on the vote.

The dominance of economists, especially those educated in the US, has helped to shape the in-house view. Professor Rogoff says that issues are extensively debated but "fundamentally most people in the fund believe in markets and market-based solutions to problems". It is, he says, an approach quite different from the interventionist instincts of many Asian and European politicians.

The application of this philosophy in the Asian financial crisis of 1997-98 caused lingering resentment among some emerging market borrowers forced to undertake extensive medium-term restructuring of their economies in return for short-term crisis loans. In 1997 David Lipton — now a White House official frequently touted as the IMF's next first deputy managing director — was installed by the US Treasury at the same Hilton hotel in Seoul as the fund mission negotiating a rescue loan for South Korea during the Asian crisis, to ensure a tough deal.

Since then, the IMF has partially retreated from its coercive approach and softened some of its ideology.

Heavy Europe presence in IMF

In recent decades, the European obsession with holding the managing directorship has seemed mildly baffling rather than deeply sinister. Despite some incremental recent reform, Europe remains heavily overrepresented on the IMF executive board relative to its economic heft, its nations separately holding nearly a third of the total votes. Yet Europeans have rarely roused themselves to speak with one voice or promote a particularly continental European view of economics or to organise much more than the promotion of yet another among their number to MD.

Europe's main contribution appears to be its influence on the IMF's managerial style. "Essentially the fund is a Eurocracy," says Ken Rogoff, a Harvard academic who served for two years as its chief economist. Ousmene Mandeng, a former senior IMF official now at Ashmore Investment in London, concurs. "The management style of the institution is largely European — hierarchical and bureaucratic," he says. "The traditional pattern is to recruit PhDs at 30 and then employ them for life."

Yet the economic philosophy that shapes its lending programmes has owed a great deal more to the US. In the 1970s, when the IMF transmogrified from underpinning the Bretton Woods fixed exchange rate system to a more general purpose crisis lender, its dominant model became what some Europeans disparagingly call "Anglo-Saxon" economics.

— Financial Times