Two cheers for Christine Lagarde: bringing an era of IMF bumbling to an end.

• Author: Lachman, Desmond
• Position: International Monetary Fund

It would be a gross understatement to observe that the International Monetary Fund has not covered itself in glory in its handling of the European sovereign debt crisis. However, this should not detract from the refreshingly bold, imaginative, and courageous leadership that Christine Lagarde, the former French finance minister, has brought to that institution since she replaced the disgraced Dominique Strauss-Kahn as IMF managing director some eighteen months ago.

Under Lagarde's leadership, the IMF is at last providing an effective voice of reason as a counterbalance to the European Central Bank and the European Commission, the IMF's "troika" partners, in efforts to find a solution to the European sovereign debt crisis. And under her leadership, there is now reason to hope that the European periphery will finally extricate itself from its austerity-induced downward economic and political spiral that still constitutes the major risk to the global economic recovery.

Prior to Lagarde's assumption of the IMF's helm in July 2011, the IMF failed miserably in its task of multilateral surveillance over the economic policies of its most important member countries. After spectacularly having failed to anticipate the U.S. housing and credit market bust in 2008, which spawned the worst global economic recession in the post-war period, the IMF did no better in anticipating the European sovereign debt crisis. In the long run-up to that crisis, which began in earnest in early 2010, the IMF was conspicuously silent in warning of the dangers of large European payment imbalances. This was all the more inexcusable since balance-of-payments problems were supposed to be the IMF's main area of expertise and external economic surveillance was supposed to be its basic raison d'etre.

Rather than sounding the alarm about the large cumulative losses in international competitiveness and about the build-up of outsized external current account deficits in the European periphery, the IMF bought into the now demonstrably mistaken view of Jean-Claude Trichet, the former president of the European Central Bank. In Trichet's view, the adoption of the euro had rendered payments imbalances between countries within the European monetary union of as little relevance as payment imbalances between the individual states of the United States. Buying into that view, and failing to recognize that, unlike the United States, Europe was very far from being a political union, the IMF was...