The world economy is in a dangerous new phase, with risks on the rise, but while the problems are largely economic, the solutions are mainly political, IMF Managing Director Christine Lagarde said.

At her opening press conference ahead of the 2011 IMF-World Bank Annual Meetings in Washington, Lagarde outlined three main issues for the discussions—the weak global economic outlook, policies to safeguard the recovery, and the need for stronger leadership.

World growth had slowed, hitting jobs and throwing more into poverty, and risks had risen considerably, she said.

The job of the IMF, with its 187-country membership, would be to help facilitate comprehensive solutions. With strong, synchronized leadership, the world economy could rebound over time. “We are in this together and we can pull out of it together,” she said.

Recognizing the “anxiety and trepidation” of markets, she said the world needed to revive the collective spirit of the Group of Twenty (G-20) meeting in London in 2009, when leaders acted together.

Dangerous new phase

Repeating her earlier warning that the world economy had entered a dangerous new phase, Lagarde said that in advanced economies, the large debts of governments, households, and banks risked suffocating the recovery.

Some key emerging economies were also still not doing enough to boost domestic demand—for their own sake, and also to contribute to global demand.

According to the IMF’s latest global forecast, released on September 20, real GDP is expected to grow by a fairly robust 6.4 percent in emerging and developing economies but by only 1.6 percent in advanced economies in 2011.

About 10,000 policymakers, private sector and civil society representatives, journalists, and academics are expected to attend Meetings, which provide an opportunity for economic leaders to consider collective solutions to the major problems confronting the world.

The four ‘Rs’ for recovery

Although policy options had narrowed, there was still a path forward. Lagarde summarized these options as the four “Rs”: repair, reform, rebalance, and rebuild.

• Repair. Advanced countries need to get debt burdens under control through fiscal consolidation. But consolidating too quickly could hurt the recovery. Credible measures that deliver and anchor savings in the medium term will help create space for accommodating growth today—by allowing a slower pace of consolidation. In the United States, household debt also needs repair, while in Europe, it is the twin problems of sovereign debt and the need to strengthen banks’ capital buffers.

• Reform. While progress has been made, the priority here is further financial sector reform.

• Rebalance. Policy actions are needed to achieve strong, stable, and balanced global growth—to shift from public to private demand in the advanced economies, and from external to domestic demand in key emerging economies.

• Rebuild. Low-income countries have navigated the crisis rather well, but they need to rebuild policy buffers to protect themselves against future storms. And the international community needs to help.

Solutions mainly political

While the policies needed were clear enough, the world needed strong leadership to get things done.

“The set of solutions and methods to address the situation are quite well known. What is needed, and what certainly we hope to be able to help generate on the occasion of the Annual Meetings, is the political leadership, and the degree of synchronization that needs to happen for the path to recovery to be made possible,” Lagarde told reporters.

“Collective leadership is definitely needed. It’s not going to be a matter for one or two countries to lead the show. As I said, each and every country is engaged in that process and is at risk in the current situation, but can also participate in the solution. So I think it is for that reason that an institution like the IMF actually makes sense.”

Difficulties in the euro zone

With much attention focused on difficulties in the euro zone, Lagarde said European countries were solidly behind Greece, but implementation of commitments would take time.

“There is obviously a gap between very solid, very strong governmental commitments at the highest level of those states, and the implementation time. That’s inherent to parliamentary life … we are no longer in Napoleonic times when a leader could just snap his fingers and make it happen. We are in democracies and it takes time.”

In the euro zone leaders’ July 21 agreement “there was financial commitment, there was a collective political determination to be in it together, there was open-ended financial support provided that countries were delivering under their commitments … and there was also a collective drive to reinforce governance and discipline among the group.”

It would be critical for both the Greek government and the euro area partners to implement their commitments. But she underlined the wider purpose of the European Union. “It’s not only about economics, it’s not only about finance. It’s also about a collective political destiny among countries that have spent centuries fighting each other and which are determined to stay together.”