European Union finance ministers and central bank governors
were wrapping up a two-day informal meeting in France when
Christine Lagarde, the French minister and host, offered a
toast. It was Saturday, September 13, 2008, and although the
economic outlook had deteriorated, the atmosphere was anything
but gloomy. The officials discussed proposals for tighter
banking supervision and agreed to adopt common reporting
standards for EU financial institutions in 2012. They
also reviewed Slovakias progress toward joining the euro
in three and a half months time.
We ended up with a nice cocktail in Nice, and
everybody went home, the 57-year-old Lagarde recalls.
The following day the financial world
The failure of Lehman Brothers Holdings thrust Europe, and
Lagarde, to center stage of the global financial crisis.
The investment banks collapse sparked a worldwide
financial panic and exposed Europes weaknesses an
undercapitalized banking sector and a monetary union without
sufficient political backing to the harsh judgments of
globalized markets. Europe is still struggling to respond to
the challenge. Lagarde, by contrast, has performed with aplomb,
first as Finance minister, then, starting in 2011, as head of
the International Monetary Fund.
At the Institute of International Finances October 11
dinner during the IMFs 2008 annual meeting, Lagarde
calmed a room of anxious bankers with her unscripted remarks.
We know whats at stake, andwe will do whats
necessary to save the financial system, she told the crowd,
speaking on behalf of the Group of Seven countries, which
France was chairing. When markets reopened two days later, the
U.S. and EU nations announced plans to support their banks with
hundreds of billions of dollars worth of
recapitalizations, deposit guarantees and nationalizations. The
following month the Group of 20 nations endorsed a detailed
blueprint for financial reform a major turning point in
The fact that the crisis involved and engulfed
everybody at the time was decisive in bringing people
together, Lagarde says in an interview at her IMF office
That sense of shared purpose has frayed to the breaking
point since 2008. Whereas emerging-markets economies were quick
to recover, the advanced economies have struggled to restore
growth, and the euro area has flirted with disaster.
Unconventional monetary policies by the Federal Reserve Board,
the European Central Bank, the Bank of England and the Bank of
Japan have unleashed volatile capital flows and raised talk of
currency wars. The mere mention of the Feds tapering its
bond purchases has sent emerging-markets currencies and asset
prices tumbling. It may not feel like 2008 all over again, but
risk is on the rise.