Time to Get Beyond the Crisis, Says IMF's Lagarde
IMF Survey online - September 21, 2012
- Cooperative action and implementation of agreed decisions needed to move beyond crisis in the eurozone
- Anchoring of expectations will be key in Europe, United States, and Japan
- Annual Meetings in Tokyo to focus on further action needed to achieve sustainable and inclusive growth
In order to move beyond the crisis in the eurozone and restore confidence in the global recovery, policymakers should implement agreed decisions that will help anchor medium-term expectations about economic policy, IMF Managing Director Christine Lagarde said in a taped video interview.
“It’s a question of really trying to get beyond the crisis in the eurozone, asserting a medium-term plan for countries like the United States and Japan, and making sure that some of the issues that actually created the crisis five years ago are really dealt with, not just half dealt with. And I’m particularly thinking about the financial sector,” she said, speaking ahead of a speech at the Peterson Institute for International Economics in Washington D.C. on September 24 that will preview the agenda for the upcoming Annual Meetings of the IMF and the World Bank.
In early October, about 10,000 policymakers, business leaders, academics, civil society representatives, and journalists will gather in Tokyo to discuss the outlook for the world economy, and how to address issues ranging from the eurozone crisis, to high unemployment, rising food prices, and better regulation of the financial sector.
The Meetings are being held at a time of continued uncertainty for the world economy, and after further action in September by the European Central Bank, the U.S. Federal Reserve, and the Bank of Japan to restore confidence and stimulate growth and job creation.
In the interview, Lagarde discusses the challenges facing not just Europe but also the United States, emerging markets, and low-income countries. She also provides an update on the IMF’s efforts to implement an important governance reform that will give more say to fast-growing emerging markets in Asia and elsewhere.
The meetings will kick off with the IMF’s regular update of its World Economic Outlook on October 9, followed by more than 300 other events, including press briefings, seminars, and bilateral country meetings. The IMF’s policy steering committee will meet on October 13, and is expected to discuss further action needed to achieve sustainable and more inclusive economic growth.
IMF Survey: It’s been five years since the crisis first erupted in the U.S. mortgage market and the world economy still has not recovered its stride. In fact, many have warned of a second Lehman moment unless problems in the eurozone and elsewhere are addressed decisively. What will it take to really turn things around?
Lagarde: It’s obvious it will take a lot of cooperative action between all players―and not just cooperative talk, but cooperative action by way of implementing some of the decisions that have been made and some of the decisions that need to be made.
But if you were to ask me, it’s a question of really trying to get beyond the crisis in the eurozone, asserting a medium-term plan for countries like the United States and Japan, and making sure that some of the issues that actually created the crisis five years ago are really dealt with, not just half dealt with. And I’m particularly thinking about the financial sector.
IMF Survey: Looking around the world, and starting with Europe, what do you see as the main challenges?
Lagarde: We have challenges everywhere, not only in Europe. Europe is obviously the epicenter of the crisis and where the most urgent, coordinated action is needed.
We need action at all levels, first of all at the national level. There are many member states that are taking measures to reform their economy, to improve their competitiveness, to open up some boundaries and territories that have prevented the creation of value and the creation of jobs.
At the regional level, the institutions and the member states have to come together and to put in place short-term actions and set a vision for the future. Short-term actions revolve around implementing the framework that has been laid out by the European Central Bank, and the vision has to do with confidence in a real currency zone that is complemented by a banking union and a fiscal union.
I’m not suggesting that it has to happen now, but there has to be some anchoring of expectations about what Europe will be in a few years’ time.
IMF Survey: Looking to the United States, what are the key challenges there?
Lagarde: The United States has short-term and medium-term challenges as well, none of which are really properly addressed at the moment.
In the short term, there is the issue of the fiscal cliff, which is a combination of fiscal [tax] cuts that will stop early in 2013 and public spending that will be withdrawn in 2013, if nothing happens. That will be automatic, and it will create a major contraction of the deficit, yes, but also of growth, which would be a threat to the global economy. That’s for the short term.
In the longer term, there has to be again anchoring of expectations about the fiscal policy of the United States in order to address the issue of the deficit and the debt as well.
IMF Survey: What about emerging markets in Asia and elsewhere?
Lagarde: Well, the emerging market economies were those that were driving growth on a global basis, and they were going steady, not particularly affected by the global crisis that concerns essentially the advanced economies.
We’re now seeing emerging market economies being affected by the global crisis with slow growth, certainly high growth still if you look at China or if you look at even countries like Brazil or India, but slower, lower, in all cases.
IMF Survey: If we look at low-income countries in sub-Saharan Africa, they’ve been growing rather strongly as a group, but they also have face commodity price increases. What do you see as the key challenges there?
Lagarde: Low-income countries, sub-Saharan Africa, were the best news we had in many ways in the last 12 months if you look at some of the countries’ growth rates and determination to deal with some of the issues, such as subsidies, for instance.
But they clearly have the threat of commodity price increases in some corners and decreases in other corners. Increases that apply particularly to food and to energy, and decreases for some of the countries that are producers of raw materials in particular―they are seeing some decreases, which can threaten the current situation and their balance of payments.
IMF Survey: You mentioned the need for global cooperation and for policymakers to implement the reforms that have been agreed. The IMF’s Policy Steering Committee, the IMFC, has played a key role in the past. What do you expect will be discussed in Tokyo?
Lagarde: The IMFC is first and foremost a very good forum where representatives of all the membership can actually discuss, compare notes, share ideas, receive the policy advice and recommendations and work and study that we do on a constant basis for them.
Because coordination is at stake, the fact that they are together with a single focus, which is to get out of the crisis and start more sustainable and more inclusive growth, we see that as a principal purpose of this upcoming Annual Meeting and IMFC meeting.
IMF Survey: One of the items that will be discussed in Tokyo also is the efforts to reform the IMF’s governance structure. What is the status of implementing the reform package that was agreed back in 2010?
Lagarde: We have worked really hard in the last twelve months towards implementation and effectiveness of this reform. We’ve made huge progress.
The first threshold was [that members with] quotas of 70 percent [of the total] that had to be reached for the quota reform to be implementable. That is done. We are beyond 70 percent.
The second set of thresholds that I have in my mind relates to the governance reform. The first one is the number of members that are supporting and implementing the governance reform. We have to hit 113 countries. We are very close to that. I really hope that we get there in Tokyo.
The second threshold for the governance reform is that of the percentage of votes. We are working really hard, and my hope is that we can get as close as possible to the finishing line in Tokyo.
IMF Survey: The Annual Meetings this time will be held in Japan. Why Asia, and how do you see the role of the region going forward?
Lagarde: Asia has been a fantastic part of the world from many respects. First of all, it’s a big part of global GDP. Second, it has enjoyed, pretty much all over, very steady growth in the last few years, including up until last year.
It’s a part of the world where we hardly have any programs ongoing, but where we have a history of relationship. And, frankly, Asia has been a fantastic partner for the IMF.
I would obviously single out Japan, which has been extremely supportive of IMF action from two perspectives: technical assistance, where Japan is a great contributor, probably the single largest contributor financing technical assistance elsewhere in the world. And financially―Tokyo has always been the first one to pick up the phone and say we are contributing, we will be there, whether it was the quota increase, whether it was the New Arrangements to Borrow, and whether it was the bilateral loans most lately when we decided to build an IMF firewall, Japan was the first.