IMF Managing Director Dominique
Press Release No. 09/295
Renewed Stability But Remains Cautious About Global Economic Recovery, Notes
Need For Continued Policy
September 4, 2009
International Monetary Fund Managing Director Dominique Strauss-Kahn,
delivering the 2009 Bundesbank Lecture today in Berlin, said stimulus measures
adopted to combat the global crisis should be withdrawn only when the economic
recovery has taken hold and unemployment is set to decline.
While acknowledging that the global economy appears to be emerging from the
worst financial and economic crisis in the post-war period, Mr. Strauss-Kahn
emphasized that the recovery will be sluggish and that a jobless recovery
remains a risk. “I am concerned about the social and economic costs of high
unemployment, which will persist even as financial markets and output
stabilizes,” he said.
Given the fragility of the recovery, he warned that “Policymakers should err
on the side of caution as they decide when to exit from their crisis response
policies.” He added, however, that governments should develop their exit plans
now so that they are able to build public support and act when the time is
Mr. Strauss-Kahn underlined that international policy coordination has been
an essential part of the response to the crisis and that "coordination of exit
strategies will be just as important.” Thanks to concerted and forceful policy
actions, the crisis had been contained, he said.
He focused on three policy areas essential to ensure a sustainable recovery:
1. Identifying New Sources of Growth
On the demand side, “the baton will eventually need to be passed from the
public to the private sector,” he said. He also called for a global rebalancing
of demand across countries, which would require strong policy actions--including
fixing the financial system in advanced economies and boosting domestic spending
in emerging Asia.
On the supply side, he called for reforms that boost productivity—by
increasing labor market flexibility and competition in product markets. He also
said that “advances in green technology could even become the microprocessor
revolution of tomorrow—while at the same time helping address global climate
On macroeconomic policies, he emphasized that “addressing concerns about
fiscal sustainability is of the first order of importance”—including spending
due to aging which is more than ten times the fiscal cost of the crisis. On
inflation, Mr. Strauss-Kahn said that he did not expect it to become an issue
until the recovery was firmly underway.
2. Reforming the Financial Sector
He expressed concern that the improvement in financial markets “is leading to
complacency in dealing with remaining and difficult problems in the banking
system.” He urged policy makers to remain focused on the crisis response agenda,
which includes undertaking a comprehensive diagnosis of banking systems and
launching asset-management programs to deal with banks’ bad assets.
On financial regulation, he cautioned that reforms are not proceeding as
quickly as necessary. He called for increasing capital requirements and making
them more sensitive to risk. He added that the operational framework for
macroprudential supervision remains a “work in progress.”
With regard to financial sector compensation, he noted that a culture of
risk-taking in major financial firms had been an important factor in the crisis,
and he raised concerns that financial sector recovery could lead to “business as
usual.” He said that the international community must “stand together to make
meaningful progress in this area”.
3. Strengthening the International Monetary System
While noting that many proposals had emerged for reforming the international
monetary system, he said that “the current system, despite its problems, is
working better than is often said.” The U.S. dollar had actually strengthened
during the crisis, which in his view “reflects the dollar’s status as an
unrivaled safe haven asset.”
To make the international monetary system more stable, he emphasized that
reducing countries’ demand for reserves and strengthening insurance mechanisms
would be essential. The IMF could play an important role in this regard and
ideas that could be explored include: making access to its funding more
predictable; making Special Drawing Right allocations more responsive to global
developments; and increasing the Fund’s resource base.