By Christine Lagarde, Managing Director, International Monetary Fund
Speech at the Peterson Institute for International Economics
Introduction: Delivering on Commitments
Good afternoon, I want to thank the Peterson Institute for inviting me here today. I would like to pay special tribute to Fred Bergsten, who will be stepping down as Director of the Institute at the end of the year. We look forward to continuing our close association with Fred’s successor, Adam Posen.
Fred has contributed so much over his distinguished career. Let me mention two qualities that particularly resonate with me. The first is his devotion to putting global considerations into the minds of domestic policymakers—not easy to do. The second one is his deep belief that policy actions make the difference. People do not always agree with Fred—I have not always agreed with Fred! But I have always appreciated his willingness to hold policymakers’ feet to the fire. And we will continue to rely on him to do that well into the future.
In a few weeks’ time, global economic policymakers will gather in Tokyo for the IMF-World Bank Annual Meetings. So this is an opportune time to take stock of where the world economy stands and—even more importantly—what remains to be done.
In fact, that is my main message today: the urgent need to implement the policy actions required to secure the global recovery.
I am reminded of the poem by Robert Frost: “I have miles to go before I sleep….and I have promises to keep.”
Policymakers—at many levels—have made important promises. I want to focus today on how those promises can be kept, and why they must be kept.
In that context, let me first say a few words on the status of the global economy.
The Global Outlook
The IMF’s updated forecasts will be released in Tokyo in a couple of weeks. Today I will focus only on the broad direction.
Let me begin by saying that many of the right decisions have been taken. Most recently, initiatives by major central banks—the European Central Bank’s OMT bond-purchasing program, QE3 by the U.S. Federal Reserve, the Bank of Japan’s expanded Asset Purchase Program—are big policy signals in the right direction.
They point the way forward and create an opportunity to build on what has been done; an opportunity to make a decisive turn in the crisis.
Just as the Central Banks were misguided during the Great Depression and accelerated that crisis, it may well be that Central Banks will have played a significant role in pulling the global economy out of this great recession.
But we should not get ahead of ourselves. The global economy is still fraught with uncertainty, still far from where it needs to be. The situation is a bit like a jig-saw puzzle. Some of the pieces are in place and we know what the picture should look like. But, to complete the picture, we need all the pieces to come together.
That will depend on delivering on the policy commitments that have been made and in that respect, there is still a long way to go.
We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last twelve months.
A number of factors are weighing the global economy down. At the center of them all is the element of uncertainty; uncertainty about whether policymakers can and will deliver on their promises.
This is having very real effects: increasing divergence of economic fortunes in the Eurozone; a tepid recovery in the United States.
And now we are also seeing other global ripple effects: the slowdown in emerging markets; great concern in low-income countries about rising food prices and volatile commodity prices; growing frustrations across the Middle East.
At the same time, many of the big legacies of the crisis risk becoming even more entrenched, even more difficult to turn around. What do I mean?
I am thinking about the lasting scars of unemployment and the massive human cost—especially among young people, and especially in countries like Greece and Spain, where growth is simply not sufficient to generate the jobs that are needed.
I am thinking about the lasting burden of high public debt—now at levels rarely seen since the Second World War. For many economies, under present circumstances it will take years of fiscal adjustment to get back to pre-crisis levels. And again, without sufficient growth, we should not delude ourselves about how painful this is going to be.
I am thinking about the lasting costs of a poorly functioning financial sector. Worryingly, the energy to implement the reforms that have been agreed—as well as the other reforms that we need—is waning. I am often asked, five years into the crisis, whether the financial sector is safer today than it was then. My answer? “Despite real progress, not yet.”
All this may seem fairly bleak. Let me assure you, we have not overlooked the reaction to recent policy announcements. But we have seen positive market responses before that turned out to be short-lived.
This time, we need a sustained rebound, not a bounce. If this time is to be different, we need certainty, not uncertainty. We need decision-makers to be real action-takers. We need delivery.
In that context, I want to focus on three key sets of policy challenges:
A. the unfinished agenda for Europe and the US—both pose critical risks at this time;
B. the mounting pressures in the rest of the world; and
C. commitments on which the IMF must also deliver.
We all have promises to keep.
A. Challenges Facing Europe and the US
Europe obviously remains the epicenter of the crisis and where the most urgent action is needed. We had seen a series of policy messages and steps—such as Spain’s program for bank recapitalization—even before the ECB’s decision earlier this month. Markets have been buoyed; now they want to see coordinated implementation—multiple players playing one game.
The issue on everyone’s minds lately is the need for a strong and effective banking union. We have advocated this for some time. We continue to believe it should be initiated as soon as possible—to break the vicious cycle between banks and sovereigns.
This will require Euro area leaders to deliver on their June 29 commitments—establishing a single supervisory mechanism and enabling the direct recapitalization of banks.
We have also called consistently for other needed actions: implement the European firewall—notably the European Stability Mechanism; implement the agreed plan for fiscal union; and, at the country level, implement the programs that are essential for growth, jobs and competitiveness.
Given the scale of the problems that face the Eurozone countries in crisis, these programs are extremely difficult—we all recognize that. We also recognize that there is no alternative to the structural reforms and fiscal adjustment needed to get back on the right path.
The programs must also be tailored to the needs of individual countries, and well balanced to ensure a fair burden of adjustment. At the same time, the international community must recognize the huge efforts being made by these countries, and provide them with the support they need, including financing.
On the Fund’s part, we are favorably considering that this be done in as timely and flexible a manner as possible: slowing the pace of fiscal adjustment where needed; focusing on measures rather than targets; and, above all, keeping the emphasis not just on austerity, but also on growth as we believe that the two can be reconciled and should not be mutually exclusive.
Uncertainty in the Eurozone remains the greatest risk to the global economy today. But, as you know, another major risk is threatening in the United States.
The immediate concern is that current law implies a dramatic tightening of the deficit by about 4 per cent of GDP next year. This would effectively plunge the country off a “fiscal cliff”—reducing growth by as much as 2 percent. Failure to reach a deal on raising the debt ceiling could also force a dramatic tightening.
We all recognize that political calendars impact the timing of key decisions. This is true everywhere. But the current uncertainty presents a serious threat for the United States and, as the world’s largest economy, for the global economy.
We all hope that political clarity emerges soon, and with it, actions to avoid the fiscal cliff; and, also, a concrete plan to bring down debt gradually over the medium-term.
Delivery on this U.S. promise of action is vital for the world.
B. Challenges Facing the Rest of the World
This is not just a US or European story, of course. Each and every part of the world has commitments to fulfill.
In some respects, the emerging and low-income countries have already delivered on a key promise. When the crisis hit, they were a light in the darkness. Emerging markets were able to lead the global economy in its time of need; and low-income countries were well prepared.
After several years of very strong growth, however, that dynamic is shifting, and the illusion of “decoupling” has vanished.
The major emerging markets are slowing. So they must follow through on the actions needed to position themselves as the global growth leaders of the future. The focus should be on countering vulnerabilities—albeit domestic or external.
For some, this may mean putting monetary and fiscal tightening on hold, or even additional stimulus—as was recently announced by China, for example. For others, they must ensure that high credit growth does not compromise financial stability or jeopardize future growth. For all, the key is to prepare for potential spillovers from other parts of the world.
The IMF can help: our Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL), both recent instruments designed precisely to provide reassurance in times of uncertainty. Colombia, Mexico, Morocco, and Poland have found that to be true.
As for low-income countries, they have performed relatively well through the crisis. But today, they are more exposed to shifts in economic fortune.
I do not simply mean potential fallout from the advanced economies. I am also thinking about the impact of the slowdown in emerging markets to which many of them are linked.
I am also thinking of the 20 percent increase in global food prices since June. Take maize and wheat—the prices of which increased by 25 percent in July alone. Countries that rely heavily on imports of these grains such as Lesotho, also hit by drought, are especially vulnerable.
Quality policies prepared these countries to defend against the crisis. Continued quality policies will help them defend against future shocks.
At the same time, the international community needs to lend even more of a hand to help them help themselves. This includes ensuring sufficient financing for the IMF’s concessional lending in the years ahead—something that I will be pushing hard for going into Tokyo.
Another focal point of discussions at our Annual Meetings will, of course, be the Middle East. We have all been shocked and saddened by the events of recent weeks. The sacrifices that have been made, the suffering that has been endured, make it all the more important that we keep our eyes on the big picture: that initial promise of the Arab transition.
Transitioning through regime change is never easy—and this is transformation on a historic scale. It takes time for new governments to formulate their strategies, to build consensus, and to move forward with a common purpose. And it takes time to build the foundation for inclusive growth and employment—the heart of true transformation. It must begin with the goal of economic stability.
These transitions also need external support, not only financial, but also by way of FDI, market access, and technical assistance. While some bilateral donors have stepped up, many members of the Deauville Partnership of international donors have yet to deliver on the scale that had been anticipated. Another promise that must be kept.
The IMF, for its part, is providing support to many of the countries involved—with our advice, technical assistance, and financing. We have already committed more than $8 billion to three countries.
The world has a huge stake in the successful transformation of the Middle East—and all of us, including the IMF, must play our part.
C. Challenges Facing the IMF
This brings me to my final point: the challenges facing the IMF and how we need to respond. The changing global economy means that the Fund needs to adapt so that we can better serve the needs of our changing global membership.
Much of this is underway, in three areas in particular:
First, with a view to strengthening global stability—the Fund’s core mandate, we are enhancing our surveillance, doing more to connect the dots between countries and focus on the stability of the system as a whole. Here, I want to highlight three upgrades:
- a new Decision that provides for deeper analysis of spillovers and cross-border effects;
- a new External Sector Report that sharpens our assessment of countries’ policies from a multilateral perspective, including exchange rates; and
- a much greater focus on analysis of the critically important financial sector.
Second, to be better placed to help strengthen the global financial safety net, we have recently increased our firepower—with 37 countries making an exceptional contribution of 456 billion dollars in support of the IMF. As I mentioned, we are now striving to ensure that we also augment our resources to support low-income countries—via the Poverty Reduction and Growth Trust (PRGT).
Third, we are strengthening our governance. Let me dwell on this for a moment because having a Fund where all our members see themselves truly at home is key to the effectiveness of our institution.
The reforms decided by our membership in 2010 represent the most significant governance changes in IMF history. They include: increasing the quota shares of dynamic emerging and developing countries by a further 6 percent, totaling 9 percent since 2006; ensuring that all the BRIC countries will be in the top ten Fund shareholders; and creating—for the first time—an all-elected Executive Board.
The good news is that we are nearly there: we have exceeded the 70 percent of consents required for the quota increase; we are very close to reaching the 113 countries required to approve the Board reform—we hope to achieve that goal by Tokyo; and we are also pushing to get the 85 percent of voting power that we need for the Board reform.
Our aim had been to reach final agreement on the whole reform package by the time of our Annual Meetings in Tokyo. We are doing everything in our power to help our members cross the finish line—if not by October, then as soon as possible thereafter.
The promise of our 2010 governance package is one that I am determined the IMF members will keep.
Conclusion: The Collective Promise
I have spoken of different promises today—made by policymakers, countries, and institutions—including the Fund. But there is a collective promise as well.
A promise to strengthen international cooperation for the benefit of all. A promise to put the broad global interest above narrow national interest. A promise to help restore certainty and confidence in the future.
And on that note, I want to return to Robert Frost. He wrote not only of “promises to keep,” but also of the “road not taken.”
We have an opportunity to take the right road. The road to global recovery that we must walk together.