Global action for a global recovery

By Christine Lagarde
September 26, 2011

By Christine Lagarde
The opinions expressed are her own.

The global economy has entered a dangerous new phase. There is a path to sustained recovery, but it is narrowing. To navigate it, we need strong political will around the world – leadership over brinksmanship, cooperation over competition, and action over reaction.

One of the main problems today is too much debt in the global financial system – among sovereigns, banks, and households, especially among the advanced economies. This is denting confidence and holding back spending, investment, and job creation. These countries face a weak and bumpy recovery, with unacceptably high unemployment. The eurozone debt crisis has worsened, and financial strains are rising. Political indecision in some quarters is making matters worse. Social tensions bubbling beneath the surface could well add fuel to the crisis of confidence.

In these circumstances, we need collective action for global recovery along four main policy lines: repair, reform, rebalancing, and rebuilding.

First, repair. Before doing anything else, we must relieve some of the balance-sheet pressures – on sovereigns, households, and banks – that risk smothering the recovery. Advanced countries need credible medium-term plans to stabilize and reduce public debt.

But consolidating too quickly can hurt the recovery and worsen job prospects. There is a solution. Credible measures that deliver and anchor savings in the medium term will help create space to accommodate growth today – by allowing a slower pace of consolidation. Of course, the precise path is different for each country, as some are under market pressure and have no choice, while others have more space.

It is also important to relieve pressure on household and banks. With respect to the United States, I welcome President Barack Obama’s recent proposals to address growth and employment; actions like more aggressive principal-reduction programs or helping homeowners to take advantage of low-interest rates would also help. And, in Europe, the sovereigns must address firmly their financing problems through credible fiscal consolidation. In addition, to support growth, banks must have sufficient capital buffers.

The second issue is reform, with the financial sector a high priority. On the positive side, we have broad agreement on higher-quality capital and liquidity standards with appropriate phase-in arrangements. But substantial gaps remain and must be addressed through international cooperation in order to avoid regulatory arbitrage.

I would also include the social dimension under the reform banner – particularly the need to identify and nurture sources of growth capable of generating sufficient jobs. This is especially important for the young.

The third target of collective action, rebalancing, has two meanings. First, it means shifting demand back to the private sector when it is strong enough to carry the load. That hasn’t happened yet.

Rebalancing also involves a global demand switch from external-deficit countries to those running large current-account surpluses. With lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery. But this rebalancing, too, has not happened sufficiently, and if the advanced economies succumb to recession, nobody will escape.

The fourth policy imperative is rebuilding. Many countries, including those with low income levels, need to rebuild their economic defenses – for example, by strengthening their budget positions – to protect themselves against future storms. This will also help to provide the space for growth-enhancing public investment and important social safety nets.

In these circumstances, the International Monetary Fund – with its 187 member countries – is uniquely positioned to foster collective action. Our policy advice can help shine a light on the pressing issues of the day – growth, core vulnerabilities, and interconnectedness. Our lending can provide breathing space for countries in difficulty. And, looking beyond the crisis horizon, the IMF can also help construct a safer and more stable international financial system.

This is no time for half-measures or muddling through. If we seize the moment, we can navigate our way out of this crisis and restore strong, sustainable, and balanced global growth. But we need to act quickly – and together.

This piece comes from Project Syndicate.

Photo: International Monetary Fund (IMF) Managing Director Christine Lagarde (L), Bahrain’s Minister of Finance Ahmed bin Mohammed Al Khalifa (2nd L) and World Bank President Robert Zoellick (R) hold a Development Committee news conference at the IMF-World Bank Annual Meetings in Washington September 24, 2011. Also pictured is World Bank Director of Corporate Communications Richard Mills (2nd R). REUTERS/Jonathan Ernst

14 comments

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I’ll be damned if I can understand what this article is saying other than that we should all do something. Perhaps someone can explain it to me. To help I’ll list some of the points that are confusing me, in the order in which Ms Lagarde has given them.

REPAIR. How are “the balance sheet pressures” on countries (and banks and households) to be relieved? The EU countries (and the US) have been trying for years to reduce their debts without any success. In my humble country it took the (past) government 11 years to repay its debt, of 8% of GDP, and that was during un-precendented mining and housing booms. The latter created record household debt, so in essence government debt was transferred to households.

What are the “credible measures” and “credible fiscal consolidation”?

As for banks having sufficient capital to support growth, this problem was supposedly addressed 2 – 3 years ago when govts gave them huge sums of (taxpayers’) money. In addition many banks raised capital from their shareholders and have sound balance sheets. But few banks, if any, are lending (to my knowledge). Instead many are generating fictitious profits to justify paying their senior management huge salaries. (I wonder if it would not have been better for govts to nationalise the insolvent banks and then use the money they gave them to lend etc to create jobs?)

REFORM: I wish I could “identify sources of growth capable of generating sufficient jobs”. (But then nobody would listen.) Aren’t all governments (and banks and businesses) trying to do that now?

REBUILDING; This is back to the first point (Repair). It is excessive debt, government and private, that has caused the problem. Now the IMF is offering to lend more money to those that can’t cope with their current debts and it will get the money from governments that are also too deep in debt and who will have to borrow it. When does more debt stop being a solution to a debt problem?

Posted by GivaFromOz | Report as abusive

Yeah, right. When the US called for global action back in 2008, it fell on deaf ears. “Your problem”, “Your fault”, “We don’t need you” is all we heard coming from the other side of the Atlantic. A lot of our taxpayer bailout dollars found their way into pockets of Europeans. NOW they want a global response because their banking system is in trouble while they try to force the lesser economies in the Eurozone to keep the euro afloat. And even so, they get irritated when Geitner shows up. Doesn’t he represent American participation? What do they expect from global action? We’re all in deep doodoo alright, but it would of helped if they worked together with us from the beginning of this crisis.

Posted by SeaWa | Report as abusive

I used to be confused as to why people would spend their time protesting outside the IMF. As time goes on, I increasingly wonder why more people do not.

Posted by russdward357 | Report as abusive

GivaFromOz has correctly determined that Director Lagarde’s advice lacks detail and that any attempt to distill detail from her words is plagued by intrinsic devils.

However, the Director’s advice isn’t intended to serve as a solution to the world’s financial problems. She is trying to convince the world that a solution might exist and if that solution is to be discovered, we must adopt a cooperative point of view and search diligently for it.

Personally, I’m doubtful that a solution exists. If I am wrong about that, I’m even more doubtful that a collective will can be forged to implement that solution.

But my point of view is guaranteed to not find a solution. We would probably all be well-advised to consider the consequences of failure in this effort. Whether you admire or despise George Soros, it’s easy to recognize the truth in his assertion that only a crisis has any chance of making the impossible possible.

Perhaps Director Lagarde is simply trying to convince us that the time to seek the impossible has come.

Posted by breezinthru | Report as abusive

We are in a period of world wide de-leveraging that will continue despite action or inaction by the world’s financial elites.

The best that we can hope for is a meaningful approach that will ease the pain somewhat. Since we have seen absolutely zero in that regard from the world’s leaders, I am not holding my breath.

So, we will see continued job losses and economic stagnation among the developed nations, a sovereign debt default from an EU member nation, and worst of all, absolutely nobody stepping forward and pointing the way out of this mess.

Have a nice day.

Posted by stanrich | Report as abusive

I am from the Netherlands, I believe that the economy is being abused by certain elites to put pressure on governments. There is enough money, there’s plenty of everything, why should people starve in some countries while here million dollar boats that sail decadent feasts are held. It has a strangle hold of the elites, frees us from them, God

Posted by rennes | Report as abusive

With all due respect, Ms. Lagarde seems to be using nice and supporting words, but it sounds a bit like the good advice everyone was giving to Japan 20 years ago. “Do something, and do it right , whatever…”

Shut up and deleverage.

Posted by Lambick | Report as abusive

My dilemma: I earn £40k p.a. and need to save 2-3 times that amount to put down a reasonable deposit on a 2-bed flat out in London’s commuter belt (zone 4). As long as I’m saving for my deposit, which will take many years, I’m not spending in the “real” economy.

Posted by AIM_1980 | Report as abusive

Ms. Lagarde is all sweet words and no action. I consider it a waste of time listening to someone who’s main goal is to find consensus and agreement. That what she said at the IMF meeting last week: I am happy that we all agree there is a crisis. She is not good at making decisions that make some members unhappy.
Lagarde is the typical EU European bureaucrats the same as US Democratic party representatives, all talk and no action. Liberals who plan to have the working people pay for the lazy and (Germans + Nordic Countries pay for Greeks), in US Obama did this hard working people pay for those who are completely healthy and live on welfare.

And these lazy liberals want to have fun and smoke pot, go to Greek buzuki etc. These idiot weak-liberal politicians need to stick in their brain that to get rid of debts you need to sacrifice some years work or some years of a country need to be sacrificed. This stands for governments and households together.
If you lived beyond your means for some years and you piled up too much debt, guess what, work double to pay it, work 2 jobs and loose some years of your life in hard work, like they have lost who build that wealth in Germany, US, China or elsewhere and don’t go out partying in night clubs and on (Greek buzuki) and pay your taxes Greek taxpayers.

We people have a big problem in this world. Liberals are running our worlds. Majority of populations like to vote for liberals, they like weak people as leaders. That’s why Merkel fired Alex Weber, because he was a tough man, she like weak men around her, so she can do what she wants. EURO and Europe will not fail if Greece defaults. That’s why Dominique Strauss Khan was scammed, so a weak person could replace him, someone who is useless who can be controlled, who doesn’t have an independent analytical mind.

The strangest thing to me is how this stock market is rallying with these empty words. Probably the Hedge funds need some short-term profit which is the only logical explanations because everything else goes against this rally.

Posted by Bledis15880 | Report as abusive

Only the delusional think liberals run the world. Superwealthy investors, corrupt government officials and executives dominate corporations, financial institutions and the bulk of government policies related to the movement of capital around the globe (and into the pockets of a lucky few). They wage the real class warfare. To believe otherwise is either ignorant or delusional behavior. Either one nets the same result: people tragicomically supporting the very people that are skewering them a bit more every day (unless he/she is in that lucky class).

Lagarde’s commentary is woefully lacking in specifics as others pointed out. Tthe “crisis” she mentions is not yet at a level severe enough to where the people pitifully blaming generic “liberals” for all of societies ills finally realize that all the things they “want” to believe have blinded them to the realities.

Very sadly, there will have to be much more suffering before sufficient numbers of the liberal bashing fools finally remove the emotional barriers of hate and animosity that hold them back from genuinely being able to reason these things through.

Heaven help us all, because historically these mass delusions cause a lot of wars and terrible suffering. And the propaganda machines around the world have definitely conned a large number of people and there seems to be no end of it soon. Unfortunately, the collateral damage to people who are not in the angry mob is a very real outcome.

Posted by rota | Report as abusive

The world has fundamentally changed since the early 1990s, due to the explosion of communications, particularly the Internet. This enabled the off-shoring of manufacturing and services from the West to the less wealthy, but huge, labor pools in India, China, and elsewhere. The demise of the Soviet Union also was a major factor, opening up the whole world to new business.

Business went on a feeding frenzy throughout the world, transferring jobs to the lesser developed countries, paying pennies on their Western dollar for the labor, selling the resulting goods in the West for 50 cents on the dollar, and pocketing the difference. The wealthy business/financial class grew quickly. And they grew stronger, buying off governments so that business regulation was greatly reduced. Also, through the media, the business class could pretty well control the general thinking of populaces.

By about 2000, the West was exhausting their discretionary wealth, and greater amounts of new disposable income were needed so that the people could continue to buy all the new production from China and India, even though Western wages were stagnant. The dot-com bubble had reached a peak and burst. How to continue the business fest?

In 2001, Bin Laden provided the answer. Go to war, and do it on credit so there is no pain, no economic feedback to the populace. Drop the interest rates to near zero, so that a housing bubble develops. Everybody go out and shop, while the US attacks Afghanistan and Iraq. The US even has its eye on Iran. Maybe the West could take over the Middle East, and solve the Israeli problem at the same time.

In Europe, they also promoted a housing and construction bubble, through loans for anybody, and any country, to keep the financial momentum.

But, of course, the debt buildup process is unsustainable. The world has been left in huge debt to the financial class. Business/finance can’t get anything more out of the system, and the system is grinding down to a much lower level.

The financial class led the world into this mess, based on unmitigated capitalistic greed. These were not necessarily very intelligent men, certainly not people of high ideals for the world, certainly not inclined towards world leadership. Their focus is simply on making money. We, the world, are now seeing the result of such a short-sighted point of view as is represented by the capitalist ethic. The people who have been leading the world, garnering the money, taking over peoples opinions and their governments, cannot lead us out of our present world dilemmas. And, it is unlikely they will let any other way of thinking easily take over.

The irony is that actually, the world presently is suffering from an over-abundance of production capability. Plus, there are huge needs for developing a sustainable means of life on our planet. The present rampant use of the worlds resources,—oil particularly, but also the rest of the mineral deposits—, cannot go on for more than a few centuries. Peak pumped oil is probably upon us. If we could organize globally, we could actually produce our way out of our present problems, and address urgent world problems such as sustainability and global warming. For our children ….

We need to control business and finance. This can only be done with world regulations. Else, business and finance just moves their money around avoiding taxes and playing one nation’s work-force off against the other. World regulation means loss of sovereignty for world nations, similar to what Europe is presently facing. It is not an easy sale, and world business, at the height perhaps of its strength, is certainly against it.
I don’t see how we are going to get the world leadership we need. It might get easier as the world situation becomes more dire. Maybe the Internet, the basis for the changes of the last few decades, will also enable a solution. It is technically possible to have world-wide votes (but who would vote?), or world-wide actions to control business (it already slightly happens). We have been thrown together by the Internet, and it has been used to great advantage by business. Will a truly counter-prevailing world-wide people’s organization arise, enabled by the Internet? We need something.

I imagine something like the above opinion is what Christine Lagarde is talking about.

Posted by xcanada2 | Report as abusive

The only way to stop global tyranny is for all countries to default on those loans, destroy the IMF and World Bank.

Posted by gotham1883 | Report as abusive

It is a well-meaning and purposeful series of suggestions and I, for one, am glad that a figurehead has provided a view. As an opinion, there are facets of the market system which are ‘wrong’. However we cannot simply pull them out or, Reform the various jurisdictions in their entirety; for example, curtailing excessive liquidity in one area but not another. Even if Capital Controls were to be implemented, this would serve to drive a wedge between the haves- and have-nots- and when prices are already skewed – this may impede deep capital formation. To make a start on goal-seeking, perhaps ‘common groups’ based on preferred sets of fundamental concerns could be formed. And while some form of Isolationism may have to exist at the beginning, these barriers could be dismantled according to any varying degree of success.
In short, while the four elements are universally applicable, any implementation first requires political will to fund a solution, so group nations who share the same concerns, insulate them from external thorns and then work on fixing their internals.

Posted by Bukhari | Report as abusive

so Ms Lagarde, what is next? collectivism? We need practical solutions to practical problems. Governments are excessively indebted while consumers are equally indebted. The instincts of all governments is to tax the consumers and reduce expenditures while the consumers instincts at such stage is to similarly save and cut expenditures. Both solutions for deeper trouble unless we find a way to increase debt like Lord Keynes suggested. It is time to be bold, let me suggest some bold ideas for the IMF:

1/ OECD should adopt a flat tax rate for all its citizens of 20% max – no deductions!
2/ Bring the rate of divident tax in line with such a flat tax rate
3/ Same for corporate tax rate across all OECD countries – no more than the individual tax rate
4/ All companies/corporations should be given a tax holiday for the next 5 years but renewable every year if they can show that they are hiring people at a rate of 20% y-o-y
5/Reduce social payments from employee and employer side to no more than 5% each side – or 10% total
6/OECD countries governments should invest massively into fiber optic and bandwidth development – this is the super highway of the future! This will increase communications and trade while at the same time enable many businesses and individuals to reduce CO2 emissions…

It is time for new and bold ideas as the current situation is truly unsustainable!

Posted by falga | Report as abusive