The New York Times this morning carried a front page puff piece about the "friendship" between German Chancellor Angela Merkel and IMF Managing Director Christine Largarde. It is full of references to synchronized swimming , and to high end Fragonard French candles being given as gifts to Merkel as symbols of "hope." Constrasts are drawn to the differences between the analytical physicist Merkel and the smooth talking lawyer Lagarde, who was an intern on the U.S. Capitol Hill. Well, as you can see from the picture, Chancellor Merkel has probably realized that she has been hoodwinked into a lose-lose position by an IMF Managing Director who couldn't have been appointed to that position without German support.
What's the big deal? France is in the throes of Presidential elections, and there isn't any doubt that the timing of Lagarde's very public volte-face about European policies handling the EU crisis is intended to help incumbent President Sarkozy and to hamstring German influence on future multinational political decisions. In financial crises past, the IMF has uniformly taken the position of "tough love" and taking the bitter medicine of austerity. Now, the IMF is all about growth and stimulus, putting Chancellor Merkel's position about profligate EU members having to put their houses in order first, in danger of seeming backward looking and intransigent.
If Chancellor Merkel sticks to her guns, which would be absolutely appropriate, she opens the doors to her own internal opposition and to resentment against austerity morphing into a broader, anti-German sentiment. If she were to throw in the towel and throw her support to the a gigantic bailout fund under the control of the IMF and Eurocrats then the future of the German economy would be be impaired and her own political career finished.
Recent U.S. trade statistics show a dramatic drop in exports to Germany, reflecting the already marked slowdown in German economic growth, which makes Chancellor Merkel's position even more difficult. Let's hope that German politicians of all parties can rally around the broader European and German self-interest, which is not served by the burgeoning bailout funds.