There are two true grey eminences in the economic-policy world today. These two old men, a year either side of 80 and either side of the Atlantic, are called in when political and economic problems are deemed either intractable or scary. Their appointment calms nerves and sends a message that the grown-ups have arrived.
That was precisely the signal US President Barack Obama wanted to send by announcing that 81-year-old Paul Volcker would head his Economic Recovery Advisory Board in the middle of one of the worst ever financial crises. But José Manuel Barroso, the president of the European Commission, got there first in November when he tapped a sprightly 79-year-old Frenchman to chair his high-level group on financial supervision, which will make its initial recommendations in February.
Jacques de Larosière de Champfeu’s resumé only explains in small part why he is the right man to chair a panel including such luminaries of Europe’s economic architecture as Leszek Balcerowicz, Otmar Issing and Onno Ruding.
Through the 1950s and 1960s, de Larosière trod the predictable path of the top French mandarin: postgraduate qualifications from the Institut d’Etudes Politiques de Paris (aka Sciences Po), followed by the functionary’s finishing school at the Ecole Nationale d’Administration, followed by fast-tracking into the Inspection Générale des Finances from 1958. His rise through the finance ministry culminated in a short stretch as director of the private office of then finance minister Valéry Giscard d’Estaing, before his parachutage in 1974 into the treasury department and the coveted role of treasury director.
Giscard’s patronage paid dividends four years later when the president nominated de Larosière to replace Johannes Witteveen as managing director of the International Monetary Fund (IMF). In Washington de Larosière first made a reputation as a cunning but no-drama problem-solver. As his first term was drawing to a close in 1982, it was becoming clear that soaring US interest rates were causing Latin American debt-servicing costs to soar to unsustainable levels. In August, the Mexican government told Volcker, who was then chairman of the Federal Reserve, the US administration and de Larosière that it would stop paying interest on its debt.
Unlike the crisis of 2007-08, the IMF played a central role in the Latin American crisis. De Larosière used the IMF’s loans as leverage over Mexico’s and Argentina’s creditors, acting – as Volcker put it – like a “bankruptcy judge”. In November 1982, de Larosière summoned all the major creditors to a meeting in New York and told them that if they did not stump up $6.5 billion in new money for Mexico and Argentina, the IMF would not approve their rescue programmes. The creditors rescheduled and de Larosière’s method became textbook, not just for Volcker, but for the next generation of US officials.
In late 1986, de Larosière announced his intended retirement from the IMF, leading to a typical squabble between EU governments over his replacement. Michel Camdessus, then governor of the Banque de France won, and his departure created a vacancy at the central bank, so de Larosière returned to Paris to steer French economic policy through the most difficult period of convergence with Germany and to take part in the design of the future monetary union. With de Larosière at the central bank and Jean-Claude Trichet, the former head of his private office, now heading the French treasury, the then finance minister Edouard Balladur believed he had a team ready to resist all populist influence, whether from the Gaullist right or the Socialists.
He was right. The double act proved strong enough to bolster the positions of four finance ministers, including two socialists, in 1987-93 as pressure became immense to devalue the franc within the European exchange rate mechanism (ERM) and allow interest rate cuts. De Larosière never relented for a moment and, together with the government, only permitted an end to the tight currency link with Germany in August 1993 if every ERM member did the same.
As the ERM crisis reached boiling point, it was becoming clear across the Channel that Jacques Attali, the president of the new London-based European Bank for Reconstruction and Development (EBRD), was in deep trouble. His lavish spending combined with the bank’s minor achievements had spilled over from press criticism to sniping from the EBRD’s shareholders. François Mitterrand, the then French president, defended his protégé for as long as he could but eventually Attali quit, opening the unthinkable possibility that a non-Frenchman could take over the Elysée’s pet multilateral bank. It was only when de Larosière’s name was mentioned as a replacement that the US government let it be known that no one else need apply.
His fix-it reputation from the IMF proved well-founded at the ailing EBRD. In-house, his style contrasted markedly with the socialist Attali: he closed down the executive dining room, flew coach within Europe, let under-used floors of the building to other banks while quadrupling the bank’s loan book. He also shifted the bank’s focus to target countries with merchant bankers and development bankers working together.
In 1998, he returned to France, after his wife was badly injured in a road accident, and effectively retired, devoting more time to his love of classical music, 19th-century literature, 18th-century French history and the theology of Henri-Marie Cardinal de Lubac. Nevertheless, he kept his hand in as an adviser to Michel Pébereau, chairman of BNP Paribas. This meant that he had a ring-side seat when the financial crisis erupted in August 2007. The bank’s announcement that it was freezing three investment funds because of US housing-loan losses fired the starting gun on the ongoing credit crunch.
From this vantage point he was able to think through the causes of the crisis and workable, non-ideological solutions. Its origin, he concluded, lay in the combination of the belief that money would never be scarce again, the hunt for high returns, over-complex financial products that made risk-assessment impossible and the spread of banking into new unsupervised institutions.
At 79, de Larosière is relishing this opportunity to bolster EU-wide supervision and help ensure that nothing on this scale ever happens again. Having stepped down from BNP Paribas, it is just possible this is his last job – but he still has two years on Volcker. And he just entered the White House.
Curriculum Vitae: Jacques de Larosière de Champfeu
1929: Born, Paris
1958-60: Assistant inspector of finance
1960-63: Inspector of finance
1963-65: Department of external finance
1965-67: Treasury department
1967-71: Deputy director, treasury department
1971-74: Department head, ministry of economy and finance
1974: Director of the cabinet of the minister of economy and finance
1974-78: Director of the treasury
1978-87: Managing director, International Monetary Fund
1987-93: Governor, Banque de France
1993-98: President, European Bank for Reconstruction and Development
1998-2009: Adviser to the president of BNP Paribas
2008- Chairman of the high-level group on financial supervision