Christine Lagarde, Managing Director, International Monetary Fund, spoke with Fortune’s Nina Easton at the Most Powerful Women Summit in Washington, DC.
An unedited transcript follows:
ANDY SERWER: And now it is my great pleasure to introduce the Honorable Christine Lagarde, Chairman of the IMF.
Just a word about her first, though. She, obviously, is a singular human being. An incredible intellect, super accomplished, fascinating person. There are just so many facets of Christine. She was a synchronized swimmer. Went to school here in the United States.
Her first job, by the way, was the same first job that Susan Collins had. They were both staffers for William Cohen, of course the defense secretary, U.S. Senator from Maine, and in Christine’s case, congressman from Maine. Nina has some more interesting details about that as well.
I had the chance to have dinner with Christine at the French Embassy last year and she told me wonderful stories about traveling around America on a Greyhound bus when she was a young woman, really getting to know the United States, she said, “Better than many of you I bet.”
She ended up in San Francisco where she worked at a restaurant that ostensibly was serving French food, she says, but it was so terrible that she quit. (Laughter.) And she ended up, listen to this, it’s amazing. She ended up being a tour guide for French tourists touring Alcatraz. (Laughter.) True.
Then she became a lapsed prison tour guide, a lapsed prison tour guide, and went into the law. Went on to lead Baker and McKenzie, where she worked with all kinds of incredible legal talent, including my brother.
Then, of course, she went to France where she became trade minister and finance minister as well. Jumped over to the IMF and became the chairman there in 2011.
It’s not a coincidence that Christine Lagarde is at the very fore of trying to solve the world’s economic problems with that kind of background and intellect. And I think it’s very interesting that her and Angela Merkel over in Europe and then Susan Collins and her colleagues in the Senate, as well as now Janet Yellen, are part of the solution. Whereas I think you can make the case that there are certain men in the House of Representatives are still part of the problem. (Applause.)
Anyway, without any further ado, please welcome the Honorable Christine Lagarde, Chairman of the IMF, and Nina Easton. (Applause.)
NINA EASTON: Well, good evening. We are so delighted to have Madame Lagarde. We’ve tried a few times before, and I want to give a good shout-out to our mutual friend, Ambassador Sue Schwab (ph.) for convincing you to come. (Applause.)
So Andy shared with us, obviously, needless to say, there’s a lot of financial crisis issues that we have to deal with in this conversation. But as is our prerogative at Most Powerful Women’s Summit, we want to get to know you a little bit first.
Andy started that process, and of course everybody knows the “firsts” about you. The first chair of Baker and McKenzie law firm, first finance minister of a G8 country, first female IMF director.
But there are a lot of little-known facts about your time here in America. You did work for William Cohen where you opened mail during the Watergate period you got from French Canadian citizens from Maine and you had to do “impeach Nixon, don’t impeach Nixon” that was sort of your job.
CHRISTINE LAGARDE: Right.
NINA EASTON: The other interesting thing about you is that you spent a year at Holton Arms. You were pretty daring, you smoked cigarettes, you used chamomile in your hair to make it blonder. You ate copious amounts of yogurt.
But here’s the most interesting fact to me: You hated math. And, in fact, in the yearbook you said, “Please, no more math.” (Laughter.) How did someone who hates math become the most important woman on the international financial scene? (Laughter.) (Applause.)
CHRISTINE LAGARDE: Well, thank you very much for the introduction. (Laughter.)
I did. And, actually, I think I still do. But I think the way math was taught both at Holton and prior to that in French school was certainly not conducive to people not so inclined to actually like math.
When I then studied law and economics actually a bit, there are lots of things that I liked about having a more scientific approach, but I still don’t like math to this day. And I’m delighted that I have really fantastic econometrists, experts in modeling, people who know it all about math. And I listen to them and I pick their brain.
NINA EASTON: It gives us all hope, us math haters. (Laughter.) So you know, when you interview for this — the IMF job, it wasn’t just given. I mean, you went through a pretty grueling process. Can you describe that?
CHRISTINE LAGARDE: Well, the process had to do with having the support of as many countries as possible. And there were a few competitors to begin with. The most serious one was my friend Augustin Carstens, who is now governor of the Central Bank of Mexico.
So he was zig-zagging the world in one direction, and I was zig-zagging the world in the other direction to make sure that we did not meet. And yet, we had to cover the same authorities and the same countries around the world.
So I never traveled as extensively as I did at that time. And then that was followed once the sort of the short list was arrived at, that was followed by an interview with members of the board, which was quite, quite an experience because that board still today only has one — it’s a board of 24 members, and there is only one woman on the board. There are a few alternates, but as far as members are concerned, there is only one female member, and that’s the U.S. representative.
But that day, Meg had to attend the Article 4 review with Treasury and the Fed, so she was not sitting at the table. As a result of which, I was interviewed by 24 men, which was an interesting phenomenon when you are yourself minister of finance, you’ve handled the presidency by France of the G20, you’ve gone through the crisis of 2008-2009, and there you are facing 24 very courteous, respectful, and nice men. (Laughter.) It came as a shock. Yeah.
NINA EASTON: And did you have to cram? I mean, was it a difficult learning process to get through that?
CHRISTINE LAGARDE: It was exhausting because prior to the 24 board setting, I had to spend half an hour with each of the 24 over a course of two days. So that was a bit —
NINA EASTON: Nothing comes easy, even in your life.
CHRISTINE LAGARDE: No. No. No.
NINA EASTON: And it’s interesting, some career choices have been made — or at least one was made for you in that the male-dominated French school that churns out French politicians and bureaucrats and so forth, you were turned down twice by that school.
CHRISTINE LAGARDE: Yes.
NINA EASTON: Talk about that. But also some career choices that — decisions that you’ve had to make along the way, and what was the best advice you ever got?
CHRISTINE LAGARDE: Well, I think having been turned down twice, first time for incompetency, the second for having missed the deadline. (Laughter.)
NINA EASTON: What do you mean by that, “incompetency”? In what way?
CHRISTINE LAGARDE: I wasn’t prepared enough. I hadn’t studied hard enough. And I was in love that year, so I spent a lot more time — (laughter.)
And the second time around, I missed the deadline. And I think that was a missed — you know, whether that was a good turnout of things or not, I don’t know. But suffice it to say that I went back a few years later and I was asked to give a speech to those young, bright kids. And I have to say that that day I felt really, really powerful. You know? (Laughter.) I had flunked, and there I was coming to tell them about the legalization of society or some really obscure matter that they had no interest in, actually. (Laughter.)
But two things that I take away from that is you fail somewhere, bounce back, get on with it, have a few drinks or whatever takes you away from that. But move on. Don’t start — don’t feel sorry about yourself. Don’t lose confidence. Just move on. Move to something else.
The second time I felt exactly the same is when I interviewed in Paris at the time for one of the top law firms. And I had all the credentials and I had done all the right things and the resume was fine and I was behaving properly and all the rest of it.
And the hiring partner, who was also the managing partner, said to me, “Well, we’ll take you. We’ll take you as an associate, but don’t expect ever to make partnership.” And that was a really, really very high-standing, excellent law firm. And I said, “Well, why is that?” That was back in ’79. And he said, “Well, because you’re a woman.”
So, again, you know, I packed up my things and I just run. I didn’t want to have anything to do with these people. So sometimes you have to pick your fight and really persist. But on other occasions, if people don’t deserve you, just go, move on. (Applause.)
NINA EASTON: Did you get advice along the way, or did you create your advice?
CHRISTINE LAGARDE: You know, in those days, there was not much by way of mentoring, coaching, and support. So I had my mother to support me. And she was an extraordinary support.
NINA EASTON: And you lost your father when you were just 16?
CHRISTINE LAGARDE: Yeah. And I constantly opposed my mother, but she was nonetheless a great support and I didn’t really know it, but she was a role model. And I constantly had my fights with her, but we often do that. Daughters’ and mothers’ relationships are complicated.
But then I was hired by a female partner back at McKenzie, and she was a role model for me. She was the strongest, she was in my view, the best lawyer in the firm. And she was always discreetly in those days, you had to do things quite discreetly. She would support the young female associates.
NINA EASTON: And “elegant” I think you said she was.
CHRISTINE LAGARDE: She was, yeah, yeah. Always.
NINA EASTON: I’m going to let you say this in French, you’ve referred to this, the sort of “bite the bullet and keep smiling.” You say it.
CHRISTINE LAGARDE: Grit your teeth and smile.
NINA EASTON: Grit your teeth and smile. So that’s a phrase I believe you learned during synchronized swimming, a sport that you took up which, interestingly enough, you took it up in 1968 when the schools were shut down over a student protest.
CHRISTINE LAGARDE: Yes, right.
NINA EASTON: But you went into synchronized swimming.
CHRISTINE LAGARDE: Right.
NINA EASTON: You’ve also said that as a woman, you have to elbow your way in. What’s an example in recent years, or especially at the IMF, where you’ve had to apply both of those or either of those precepts?
CHRISTINE LAGARDE: No, I’m not sure I would say “elbow your way in” because in that, there is something of sort of push people out of your way. I think you can very much progress and make your way as Holton would say (Latin phrase) if you remember.
NINA EASTON: Yeah.
CHRISTINE LAGARDE: For those who don’t speak Latin on a day-to-day basis, I’ll find my way, and if I don’t find it, I will make it.
So I think you can actually make your way. You can follow your destiny without necessarily being aggressive, without pushing people. You can let other people progress as well along the way. But you should not shy away from the things that you feel strongly about.
And I’ll give you an example. When we had to deal with Greece quite a lot in the last few years. And about two years ago, we had great difficulties about what was the next step. And was the debt sustainable or not? And over what period of time would it become sustainable?
And there was a lot of disagreement, a lot of controversy, a lot of political ganging on that particular topic. But I knew we were right. I knew we had checked the numbers times and again. And I knew that the debt sustainability analysis that we were producing was sound, solid, and was a good principle on which to build to help that country restore the situation.
So I stood my ground. And when Angela Merkel said, “Christine, you know, how can you be so certain? Debt sustainability analysis is only a debt sustainability analysis, after all.” And I said, “Yeah, but that’s where you want to anchor everything you do. And if you throw zillion in a country, you want to have a good anchoring point.” So that, to me, was a bit of a defining moment when we stood our ground. Other members of the troika were not necessarily as convinced as we were. But it wasn’t elbowing my way, it was saying, “We’ve done it. We’ve reviewed it. It’s solid in terms of analysis, and we have to build around it.”
NINA EASTON: And you got some heat for that. And you got some heat for suggesting that the Greek style of paying taxes probably wasn’t up to snuff.
CHRISTINE LAGARDE: Yes.
NINA EASTON: And you got some heat when you said that the European banks were under capitalized. Let’s take that sharp eye to Europe right now and tell us what needs to be done.
CHRISTINE LAGARDE: A lot needs to be done. But I want to, because it’s easy to go for the euro bashing, that’s been the game for the last two years. And they have done an awful lot.
For people who don’t understand Europe, they don’t understand what they’ve done. But I’ve been finance minister for four years, and they have done a lot. What they need to do today is keep up. Keep up the work. Keep up the reform that they have started doing. You know, that’s the case for the product and service market. It’s the case for the labor market. It’s the case particularly in the banking sector.
There’s a lot of fragmentation still going on. There is not a good monetary transmission going on. They have to work on that. They have to continue the job that they have started. They will be doing a lot of what they call balance sheet assessment, asset quality review, stress testing, and all the rest of it.
I don’t think we should start from the basis that they’re going to do a bad job. We should give them the credit of wanting to do it seriously, wanting to coordinate the work from the ECB where Mario Draghi has done an extraordinary job to rescue that zone.
But now that they want to do it, it’s going to be messy. There will be obstacles. There will be hiccups on the way. There will be bumps on the road. The media will say how terrible it is. At the end of the day, they will make it. I’m convinced of it, and I think that there is the political will, the political urge to actually keep it together.
Those people, some of them have suffered in their flesh, in their family from what’s happened back 70 years ago, they’re not going to let it drop like that because of lack of courage. Their courage will be eventually there to respond to the challenge.
It’s a huge challenge. You bring 18 countries together. I’m talking about the Eurozone here. You bring 18 countries with 18 different flags, 18 different national anthems, 18 different defense, and you ask them to have one single currency, one single set of fiscal policies that are compatible with each other and to bring their banking system under one roof with one resolution system. It’s a big job.
NINA EASTON: Yeah, I’d love to go beyond this, there’s so much more to say about this. (Applause.)
Time is short, so we do have to turn your attention a little closer to this town. I thought of your precept, grit my teeth, when you had all the ministers here this weekend and you watched what was going on on the Hill.
I wonder, you know, but you’ve also spent a lot of time here and understand the political system here.
CHRISTINE LAGARDE: I’m not sure about that.
NINA EASTON: Were you explaining it or tearing your hear out? You don’t understand it, go ahead.
CHRISTINE LAGARDE: You know, what was complicated this week, actually, is that we had about 300 ministers of finance and governance of central bank from all around the world. And we had a focus, which was essentially unconventional monetary policy and consequences for the rest of the world. How do we develop — anchor the recovery? How do we make sure that emerging markets are going to continue to do well without suffering from tapering and dah, dah, dah, dah, dah?
And the only thing that was on their mind was when is this going to end? What is this discussion about the debt ceiling? It really completely overwhelmed the discussion. And believe me, it’s difficult to explain.
I mean, you can explain the sort of direct fiscal consequences. You can try to imagine what the indirect consequences would be. You can try to speculate about what a mess it will be on the markets. You can imagine the accident. You can assume that it’s going to be worse than previous events. But it’s difficult to explain the rationale behind it.
NINA EASTON: And you’ve warned, of course, over the last couple days of massive disruption if Thursday passes and there isn’t a deal.
But what if there’s a deal which most likely will happen where the deadline is just pushed off for another two months, another three months? Doesn’t that create an uncertainty in the markets in and of itself? What’s the danger of putting off the deadline?
CHRISTINE LAGARDE: Well, it’s going to put Susan Collins and her friends back —
NINA EASTON: And Senator Klobuchar.
CHRISTINE LAGARDE: Yes. Back to the drawing board yet again because I think that it will reactivate the same sort of trepidation, anxiety, and worries.
What’s amazing is that the United States of America, first largest economy in the world, is still and will probably continue to be regarded as a save haven to which money can flow back when there’s trouble.
Now, you know, it’s a bit like a rubber band. When you pull, you pull, you pull, you pull, it works. It works. It works. But who wants to take the risk of that breaking?
NINA EASTON: So, again, so there’s danger to even putting off the deadline to January?
CHRISTINE LAGARDE: You’d just reactivate the same debate over.
NINA EASTON: Right. And is there a danger to the economy, the U.S. economy, and the world economy by not addressing the debt? I don’t mean — I mean not, you know, taking steps to address the U.S. debt? Do you consider that a damper on the economic growth?
CHRISTINE LAGARDE: Yes. I mean, it’s the most serious thing that could happen. If it is not addressed, if it’s not tackled, it will be very, very damaging, and not just for the U.S. economy, for all economies.
NINA EASTON: I guess I mean like reform to bring spending and borrowing into line. Do you consider that —
CHRISTINE LAGARDE: Well, that’s another debate. I think the most critical one is the issue of the debt ceiling. The issue of default, no default, what’s a technical default, what’s a real default? And so on and so forth.
NINA EASTON: So that’s what you’re talking about?
CHRISTINE LAGARDE: That’s the most urgent matter. The rest — the fiscal policy of the United States of America, I summarize it for my simple mind as slow down, but hurry up. (Laughter.)
NINA EASTON: And describe that.
CHRISTINE LAGARDE: Well, slow down means no brutal, heavy duty fiscal consolidation in the short run because you’re going to prevent recovery from taking roots and strengthening. But hurry up to take the measures now that are going to deal with the long-term liabilities that will come to haunt the United States back in 2020. Whether it’s entitlement or whether it’s high interest, that will come to haunt the economy in 2020 if nothing is done before.
So that’s why we say hurry up, do it now. Because it will produce results in the years to come, and it will address the situation that would otherwise be very difficult in 2020.
NINA EASTON: There’s a lot of talk about a new normal in the U.S., and frankly, in the global economy where we’re going to have — even when we have economic growth, it’s not going to be followed by job growth.
Do you see unemployment rates getting to pre-recession levels, and at what point?
CHRISTINE LAGARDE: If you look at numbers in this country, and if you look at unemployment numbers, it has progressed enormously. It has gone from the highest at 10 percent down to 7.3 percent. So, granted, the participation rate is probably lower, and the number that we should also look at is unemployment numbers.
But there has been progress and jobs are being created. It’s the same in other countries, not very fast in Europe, and in the Eurozone in particular. But they’re all signs of hope. Where those jobs will be, what will be the job content, how the economic model is going to change to what business model are we heading to? I think we are facing huge transitions at the moment. And they’d better have jobs, because otherwise we’re not just facing economic problems, we’ll be facing social problems.
NINA EASTON: And you’ve warned about a rush to the exit for the Fed’s, what you call “unconventional” monetary policies. $85 billion a month in the QE program. Is that something you communicated to Ben Bernanke before their decision to stay the course?
CHRISTINE LAGARDE: Central banks are independent. But what I have said, including in Jackson Hole where all central bankers get together, is that given that the Fed’s decision has impact across the world, it would be appropriate not just to communicate well, not just to gradually phase out, but also to cooperate with other central bankers so that they understand what precautions they have to take, what consequences it will be for them, and they can prepare better. I’m not sure they’re all happy to cooperate. I think they would be well advised to do so.
NINA EASTON: And I know you wanted to mention the IMF came out with a gender study, which is the first time I believe that you’ve looked at the impact of gender in the world economy.
CHRISTINE LAGARDE: Yes.
NINA EASTON: Can you talk about Japan in particular, was an interesting case study of what — for cultural reasons women aren’t in that economy to the level they are in other industrialized countries. What has that done to growth in Japan?
CHRISTINE LAGARDE: I’m looking at it the other way. What could it give to growth in Japan? And we just recently published for the first time a study of this called Women, Work, and the Economy. But we also did a special chapter on Japan because Japan has a very specific issue. They have an aging population. They’re not particularly immigration prone, to say the least. And currently, Japanese women are not participating in society as much as the average OECD country.
So the resources that the Japanese people can tap into are the Japanese women. But for all sorts of reasons, including cultural, lack of institutions that can help with childcare and a general sort of attitude of society towards female participation, it’s not happening.
Now, as a follow-up to that study that we published exactly a year ago, I’m pleased to report that maybe not attributable to us, but Prime Minister Abe has made it part of his budget and commitment to actually really fund childcare centers in Japan and to encourage women to join the workforce. They are far better educated than Japanese males. They really can contribute to the growth of society. And by our account, and I don’t claim the math credit to it, but the teams are doing it, the GDP of Japan could increase by about 9 percent just as a result of their participation and that before the end of the decade. So that’s really important. (Applause.)
NINA EASTON: Two more quick questions before we get the cane, and quick answer to this. You’ve gone from describing quotas for women in terms of Europe for women board members as offensive to saying it should be a temporary measure at least, correct?
CHRISTINE LAGARDE: What should be a temporary measure?
NINA EASTON: I’m sorry, quotas for women and board members.
CHRISTINE LAGARDE: Oh, yes, yes.
NINA EASTON: Sorry, I switched on you. We’re back to Europe.
CHRISTINE LAGARDE: Yes.
NINA EASTON: So you think they’re important as a temporary measure?
CHRISTINE LAGARDE: But, look, it’s working. When I was finance minister, we supported a bill that went through that requires that there be at least 20 percent women on the board of companies by 2014 and that there be 40 percent by 2020. They’ve exceeded the threshold of 20 percent already. So I think quotas should not be a long-lasting feature because we can do better than that. But at least in the first stage, when you have such a big step to take, yes, temporarily, I think it’s very helpful and we should use it. It will be used, by the way, on the pan-European basis.
NINA EASTON: Since you won’t answer this last question, I’ll ask the audience to answer it: Madame Lagarde as French president? (Cheers, applause.)
Thank you so much, it’s been an honor. Thank you.
CHRISTINE LAGARDE: Thank you. (Applause.)