Chrystia Freeland

Regular readers of Chrystia’s column will remember that she recently called out the IMF for failing to foresee the destabilizing effects of rising youth unemployment in Egypt. Specifically, in its April 2010 Article IV assessment of Egypt, the IMF concluded the country’s economy was in fact more resistant to external shocks thanks to “sustained and wide-ranging reforms.” Well, it turns out that the IMF has evolved in its thinking.  In an exclusive interview today with Chrystia and Reuters IMF correspondent Lesley Wroughton, IMF First Managing Director John Lipsky announced that going forward the Fund will more heavily weight unemployment risks in its annual country assessments.  “We think that these are very important issues and need to be looked at, and again, not just in cases where it might result in political turmoil but just as a matter of course in examining economic developments and policies,” Lipsky said.

Watch the whole exchange here:

Posted by Peter Rudegeair.

Though the ongoing crisis in Europe dominated Chrystia’s interview with Dominique Strauss-Kahn last Thursday, the IMF head has much to say about the economic outlook for the United States. He believesthe biggest issue facing the U.S. right now is growth — not deficits — although he added that America needs a medium-term plan for fiscal consolidation.

Last week’s passage of the tax compromise should raise America’s growth prospects, but in response to a question about whether the tax cuts on high-earners are stimulative, Strauss -Kahn said, “of course not”.

When asked about the Federal Reserve’s latest round of quantitative easing, Strauss-Kahn endorsed the move, saying it will restore growth both outside and inside the U.S.:

That the American economy is so one quarter of the global economy. And has a role, which is bigger than this 25%. So what’s going to happen in the American economy in 2011 and 2012 has a lot of consequences on the rest of the world. So we have to look the kind of policy which is implemented here not only having in mind the effect of the US economy itself but also the spillover under rest. And that’s why people may have sometime the mixed view. They say, oh, it may help the US economy but on the other hand this can quantitative easing, number two, creates problems to the others because there’s too much liquidity in the world and so on, which is true. But the other hand, what’s the alternative, if the US economy doesn’t grow enough then the consequences under the rest of the world are also very, very bad. So I think that what the authorities are doing goes in the right direction.

QE2 has been fairly unpopular outside the United States. Perhaps more worryingly, Strauss-Kahn thinks the coordination between the major world economies that was fostered at the depths of the financial crisis has now faded away:

Cooperation was incredible and precedent during the climax of the crisis, and that’s certainly the reason why we’re able to avoid a crisis as big as the great depression. The problem is that the momentum for cooperation is now a bit smaller because as people believe rightly or wrongly, I think, whether wrongly that the crisis is over, they have the temptation to go back to their domestic problem and to forget about their consensus and their coordination, you know, in April 2009 in London, even in September 2009 in Pittsburgh, people were scared. That’s good, because when they’re scared they want to work together. Now, the less scared, maybe wrongly again, but the less scared, and so everybody is going back to his own domestic political problem, which I can understand, but that’s not good for the global economy.

Chrystia later asked if Strauss-Kahn was worried about a currency war between China and the U.S. He said that the renminbi is  “substantially undervalued” but dismissed any claim that a one-off revaluation would rebalance the global economy overnight, calling the idea a “dream”:

[T]o believe that there is a kind of silver bullet that will solve all the economic problem in the planet just because the Chinese currency will go back on its appropriate value is a bit of a dream… But the question is, how can we convince the Chinese, and I think we are in the process of convincing them, that it’s in their own interest to shift their policy from a totally export-led growth model, which was the model before the crisis, to a model of a growth which is more based on the domestic consumption. And they agree with this. And they shifted in this policy, of course, it’s uncertain and million people economy doesn’t happen overnight. But in the process while they’re doing this they will- it will be consistent with higher value of the renminbi because the shift can be origin of inflation and higher value of the currency will have fighting inflation because to have more consumption at home they will need to have more purchasing power and higher currency will help this.

To reinforce his point, Strauss-Kahn observed that over the past six months, U.S. trade has not improved even though China’s trade surplus has decreased.

Posted by Peter Rudegeair.

Yesterday,  IMF Managing Director Dominique Strauss-Kahn sat down with Chrystia at the Newseum in Washington, D.C., for an hour-long Newsmaker interview. The European sovereign debt crisis dominated most of the conversation. The IMF chief admitted that the situation “worried” him and that he wanted Europeans to find a more “comprehensive” solution:

Well, I’m worried. And that’s why I’m urging the Europeans — I just attended the Euro Group meeting, which is the group of the finance minister of the eurozone — two weeks ago. I’m urging for the European Union to provide a comprehensive solution. Because this piecemeal approach, which the deal with Greece — as was Ireland after, and maybe another country later on — obviously doesn’t work. And the markets are just waiting for what’s next …  The institutions are still thinking too local when they’re facing global problems.

A more comprehensive solution will require better coordination among national European governments.  As Strauss-Kahn said, “You can’t have a single currency, especially in times where you have troubles, without having more coordination in economic policy.” Two concrete proposals the managing director endorsed were stronger stress tests for the banking sector and an increase in resources for the European Financial Stability Facility, the European bailout fund.

Although the euro has fallen in recent weeks on speculation that some battered members of the eurozone might be forced out, the IMF chief assured Chrystia that the euro is a resilient currency that will survive this period of panic:

It’s a strong currency, which behaved during the last ten years better than even the deutschemark in the previous decade. I see absolutely no reason — I see many reasons why there may be a problem in the eurozone in terms of growth — unemployment, even beyond unemployment, social problems, because the question is a very difficult question to solve in the coming 10 years. But that doesn’t mean at all that I see any threat to the euro. Any solution other than the euro would be worse for the eurozone members.

When Chrystia asked whether the EU-IMF rescue package for Ireland would work, Strauss-Kahn replied with an emphatic “yes:”

He did concede that the austerity conditions of the rescue package will make the lives of many Irish citizens more difficult. While the alternative solution — forcing the creditors of Ireland’s crisis-stricken banks to shoulder more of the bad bets which are weighing down the economy — is popular, Strauss-Kahn said such proposals were “not responsible” because they would invite contagion:

The role of Ireland in the shadow banking system, also in the official banking system is much bigger than the size of its economy. The Irish economy is more or less one percent of the union’s GDP, which is not that much. But the consequences of what’s happening to the Irish bank has a lot of influence and spillover in the rest of the world, including German banks, including French banks, and obviously [the] U.K.  So I wanted absolutely to say that when some are messing up in the banking sector … the losses of the bank should not be totally paid by the taxpayer. Fair enough.  On the other hand, if you don’t take into account the possibility or the risk of contagion, how about putting in some place some haircut that will have to go to other countries, and, finally, put the other countries which are somewhat at risk in a situation where it will be impossible for them to find any funding. If you don’t take this into account, it’s just not responsible.

Posted by Peter Rudegeair.