By Vivienne Walt ~ PARIS

On a chilly night in March, in a concrete building on the grand avenue d’Iéna in Paris, a silver-haired woman sits at an empty conference table. Most of the offices at the international monetary Fund are dark, but managing director Christine Lagarde has been on the phone for the past several hours, handling a flurry of calls to try to rescue yet another teetering European economy from collapse. Lagarde turns off the video monitor connecting her to staff at the Fund’s headquarters in Washington and eases into an armchair to pour out a cup of Darjeeling tea, one of her rituals for life on the road.

She started the day in Algiers, hosting an all-women’s breakfast with a film producer, AIDS lobbyist and others. That had been a welcome change after “spending two days with authorities and finance people and banking people—all men, all men,” she says. The difference is not just about gender. “The minister of Finance is going to talk to me about the macroeconomic framework,” Lagarde says. “The central bank governor is going to talk to me about the capital ratio of banks.” Women, on the other hand, “talk about things they do on a daily basis.” that resonates with Lagarde, a lawyer by training and a politician by instinct. She doesn’t speak in the opaque language of the IMF’s economic policy wonks, and insists this is an advantage. “Sometimes there are meetings when I stop the talking and say, ‘Stop it. You’ve lost me,’” she says. “You have to use simple terms that people out on the street will understand, because otherwise you are just talking to yourselves.”

The disconnect between Europeans and their economic policymakers has never been wider. Five member-nations of the European Union have come close to bankruptcy since 2010, with the latest narrowly averted disaster on the tiny island of Cyprus, home to just 1.1 million people and an economy the size of Boise, Idaho’s. Because it is part of the E.U., the other members had to come up with a plan to bail out Cyprus’ failing banks or risk sending the European—and eventually global— economy into a tailspin. The result was not pretty: a disastrous first agreement sparked a week of protests and threats of a bank run. The eventual deal may stave off default for Cyprus and save the euro from freefall, for now. But the process of getting to the deal revealed just how deep Europe’s economic dysfunction runs.

The agreement ought to have been vindication for Lagarde, 57, who has been warning about the need for basic changes in the way the E.U. functions since before she took over the IMF post in 2011. The IMF was formed in 1944 to avert another Great Depression by loaning money to troubled countries, but after decades of dealing mainly with the third World, 83%of the money in the IMF’s General Resources Account— extended loans, in plainspeak—now goes to three limping European countries: Portugal, Greece and Ireland. Lagarde says their immediate problems, mostly the product of profligate spending and borrowing, are distracting the E.U. from essential reforms, like creating a continent-wide banking system to impose strict regulations and safeguards against those very problems. “Crisis management has been the day-to-day life,” she says. “They need to spend energy and focus on the long-term backbone of Europe, to make it a strong regional monetary, banking and fiscal institution.”

To accept that message, the E.U. will first have to close its deep schisms. Lagarde is emerging as the counterpoint to the take-your-medicine toughness from German Chancellor Angela Merkel. But with Germany increasingly unwilling to bail out laggards, Lagarde’s charisma alone may not be enough. Instead, she and her partners at the E.U. and the European Central Bank (ECB)—the two other arms of the “troika” that signs off on E.U. bailouts—have come under fire for internal dissension when they should be presenting a united front. Lagarde inevitably catches some of the resulting flak. Some economists even seem nostalgic for the days of Lagarde’s predecessor, Dominique Strauss-Kahn, who resigned in disgrace after he was hauled into a New York City jail in may 2011 on charges of sexually assaulting a hotel maid. (The charges were eventually dropped.) It was Strauss-Kahn who negotiated the IMF loans to Greece, Ireland and Portugal, using his credibility as an economist and skill as a dealmaker to keep dissension in check.

Lagarde was supposed to be a different kind of IMF chief—if not a brilliant economist, then someone whose personal charm and sharp intellect had won her close friendships with officials worldwide in her previous job as France’s Finance minister, and who might bring the IMF’s 188 member countries together. “I’m not sure it’s an absolute necessity to be the top-notch economist to actually understand economies, and help them to give the best of what they can give together,” she says. Still, critics argue this is an especially inopportune time for a non-economist to be heading the IMF. “She is not an economist, and for an institution that is so technocratic, that is some- times a tension,” says Domenico Lombardi, an Italian economist and author of a report on IMF reform. “Clearly at this juncture having someone with some bolder thinking would be an asset.”



Lagarde’s formidable people skills were severely tested on March 15, in the last stage of talks over the crisis in Cyprus. She was pushing for a serious overhaul of the island’s shaky banks, in which wealthy Russians and Russian companies had parked billions in offshore accounts. The meeting descended into a 10-hour political battle, and the bank overhaul was largely lost in the argument. Finance ministers from rich, northern countries, tired of bailing out southern Europe, insisted that Cyprus’s big depositors pay a hefty levy to defray some of the cost of the bailout. The island’s president Nicos Anastasiades balked. Just before dawn, the troika leaders announced a compromise to spread the costs to all depositors—against Lagarde’s wishes—requiring those with less than 100,000 Euros to pay a fee of 6.75% on their savings while keeping the levy on big depositors to just under 10%.

Politically tone-deaf, the plan put the burden on small savers as well as big depositors: predictably, it ignited furor. Thousands of Cypriots emptied out ATMs, and an old-fashioned bank run was pre- vented only because the governments orders the banks closed. As their parliament prepared to vote on the deal, thousands stormed into the streets with the word “NO” scrawled on their palms. The parliamentarians nixed the deal.

With the proposal she had opposed now in tatters, Lagarde again pressed her case for E.U. reform. At a conference of German bankers in Frankfurt on March 19, she zeroed in on one message: Europe needs a strict, E.U.-wide banking union, and quickly. The banking scheme, a key IMF proposal, is aimed at staving off repeated disasters, by having the ECB oversee about 6,000 banks in the 17 countries that use the euro as their currency, and banning them from taking on mountains of debt—as the banks in Cyprus had done. Looking out at the audience of gray-suited German bankers, Lagarde called on her years of experience as managing partner of the American law firm Baker & McKenzie. “I’ve been in business, you are all in business.” Europe, she told them, is only “half built, and half safe.”




The agreement hammered out by the troika and the Cypriot government in the early hours of March 25 put in place strict new capital controls in Cyprus. This was much closer to the bank overhaul Lagarde wished for. “This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth,” she told reporters. But the price of trust will be painful: the country’s second largest bank will be shuttered, and many foreign depositors will likely take their billions elsewhere. Without its tax-haven status, the Cypriot economy is expected to shrink dramatically, and thousands of jobs will be lost. “It’s not just Christine Lagarde who’s to blame,” says Eleni Kyriakou, 45, who has worked at Bank of Cyprus as a clerk for 21 years. “It’s the IMF, it’s Europe, it’s our own leadership. I just don’t understand what their goal is: so they want to destroy us as a country?”

Some of Lagarde’s partners in the E.U. aren’t happy either. The Cyprus talks revealed clashing visions, with the IMF and ECB pushing for serious reforms even as some E.U. officials tried to come up with a first chair Lagarde, center, at a meeting of the International Monetary Fund and World Bank in Tokyo. She has led the IMF since 2011 deal that was more palatable to the Cypriot government. For all the political capital she expended on the Cyprus deal, it gets Lagarde only a little closer to her goal of a unified E.U. banking system. Similar to the U.S. Federal Reserve, she believes it would “anchor in the medium and long-term this European reality that was the dream of the founders of Europe.”

In the meantime, she must deploy her charm to rally the rest of the IMF’s members. (Next month, she travels to Beijing, a key contributor to the Fund.) It won’t be easy to persuade non-European contributors of funds that bailing out the wealthy continent of Europe is a worthwhile use of their money; a resolution to make permanent the U.S.’s contribution is currently stalled in Congress. “It’s like the U.S. telling the world it has to bail out California,” says Simon Tilford, chief economist at the Center for European Reform in London. “The rest of the world would say ‘stuff off,’ and that is pretty much how they feel [about Europe].” Still, he says, “I don’t think anyone could have done a better job than she is doing.”

Back home, Lagarde faces another headache: French police recently raided her apartment in Paris, as part of a criminal investigation into her role in a $367 mil- lion government compensation package to a French businessman in 2008, while she was Finance minister. Lagarde denies any wrongdoing, but if, as some speculate, she someday runs for office in France, the investigation could complicate things.

For now, Lagarde seems happiest when squeezing in meetings about women’s empowerment whenever she can. At one re- cent appearance in the ECB in Frankfurt, hundreds of women are jammed into a small wood-paneled auditorium, waiting to hear her speak about her views on smashing the glass ceiling. They erupt in wild applause when Lagarde enters, and she is in turn exhilarated, compared with her more studied demeanor during her earlier address to the German bankers. She laughs when I make the comparison. “I’d be lying to you if I said I was passionate talking about the E.U. banking union,” she says. “But it is very important.”

Read this story on TIME Magazine.