On Lagarde

Christine Lagarde is in a hurry. Having just launched one of Europe’s most aggressive economic stimulus packages, a €26 billion ($36 billion) mix of corporate tax cuts and infrastructure spending, France’s elegant Finance minister is now pushing for most of the money to be pumped into the French economy by the end of the first quarter. "We want to get cracking as quickly as possible," says Lagarde in her stylish office in December before hosting European Union Finance ministers for yet another meeting on the global turmoil. "We want investment, investment, investment."

Lagarde, a 53-year-old lawyer and former chairwoman of Chicago-based law firm Baker & McKenzie, has emerged as a central figure driving Europe’s response to the financial crisis. As holder of the EU’s rotating presidency in the second half of 2008, French President Nicolas Sarkozy pushed fellow leaders for action, and Lagarde has been fleshing out the policy details for everything from massive bank guarantees and an overhaul of financial supervision to coordinating fiscal expansion. She is more reserved than Sarkozy, but a pragmatic, straight-talking style has served her well. (She says her boss’s energy is infectious: "The whole team has to work at the same tempo and with the same drive, otherwise you lag behind.")

On the European front, Lagarde wants to enhance Europe’s network of national banking supervisers with a new college of supervisors to oversee cross-border banks and adopt flexible minimum capital requirements for financial institutions that could be adjusted according to the economic cycle. Under the EU’s rescue plan for European banks, Lagarde helped negotiate the agreement on bank guarantees and capital injections, with France offering a €320 billion state-backed lending facility and a maximum of €40 billion in capital to bolster its banks’ balance sheets. In return the country’s banks have agreed to increase lending and have endorsed a new code of conduct promising "no outrageous compensation and none of those silly bonuses."

Like most of its neighbors, France, the second-largest economy in the euro zone behind Germany, faces a severe economic slump. Unlike Germany, Italy and Spain, France has narrowly avoided recession so far, but output is likely to contract in early 2009, the French statistical agency Insee recently predicted; business confidence is at its lowest level in 15 years.

Lagarde is convinced that swift government spending is essential and believes other European nations will follow France’s lead. In December, EU governments agreed on a €200 billion stimulus package equal to about 1.5 percent of GDP. France contributed its own €26 billion package that is equal to about 1.3 percent of GDP. She estimates that the French recovery plan, with tax breaks for new investments and infrastructure spending, will add 1 percent to France’s GDP in 2009. Stimulus plans by other European countries, such as the U.K., Italy and eventually Germany, should bring another 0.5 percent boost. As a result, she predicts France will post growth in 2009 of between 0.2 percent and 0.5 percent.

France’s willingness to spend now despite a public deficit of around €56 billion, according to Eric Woerth, the French Budget minister, contrasts with Germany’s reluctance to slip further into the red. Still, Germany’s Chancellor Angela Merkel pledged measures worth €32 billion over the next two years and promised more in January. Merkel is "on another timetable" because Germany’s government is facing an election this fall, Lagarde says. "My sense is that Germany will take a little bit more time but will also put in place a significant stimulus package."

Business leaders in France welcome Lagarde’s plan but worry the country may be overspending. "The French government is doing what it has to do, but it’s starting from an extremely fragile base," warns Jean-Claude Gruffat, the head of Citigroup in France. But Lagarde is adamant: "If we have to choose between social unrest, a depleted economy and massive restructuring with a relatively capped deficit or maintaining the social chemistry, preserving major sectors of industry and increasing the deficit, I think it's an easy choice."