Lagarde: Coordinated efforts imperative for sustainable crisis resolution

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), on 5 April held a lecture at the Goethe University in Frankfurt with the title "Decisive Action to Secure Durable Growth". This was the so-called curtain-raiser speech delivered ahead of the IMF Spring Meetings on 15-17 April in Washington D.C.

To reflect the context of her lecture, Ms Lagarde drew on events in the life of Johann Wolfgang von Goethe, who she said was not only an acclaimed poet and author but also a diplomat and, as she put it, an "internationalist". This brought her to the themes of her speech: interconnectedness and internationalism, as well as cooperation. In her view and in light of recent events, solidarity and cooperation are key to solving present-day challenges. Looking ahead to the upcoming Spring Meetings, she said the focus of the 188 member countries would be the state of the global economy based on the latest figures of the next IMF World Economic Outlook, to be published in the week before the meetings.

"We are not in a crisis"

Ms Lagarde opened by looking at the broad trends, and underlined that great progress has been made since the financial crisis by saying that recovery continues and there is growth. She added that a number of factors influence the overall outlook, however: China’s relative slowdown, lower commodity prices and financial tightening in many countries. Since growth has been too low for too long, she sees the risk of self-reinforcing negative effects and a "new mediocre". Policy makers need to confront the challenges and act together to improve global confidence, which, she said, would have a substantial positive effect on the global economy.

Downside risks

Although economic sentiment has improved since the beginning of the year, Ms Lagarde warned against complacency. She explained that she sees a number of risks to both advanced and emerging economies in that the former are still struggling with crisis legacies such as high debt, low inflation, low productivity and some also with high unemployment. The latter, she pointed out, are increasingly vulnerable to lower commodity prices, higher corporate debt and volatile capital flows. However, Ms Lagarde stressed that the risks should not be seen in isolation, since they all have a macrofinancial dimension where they could – in adverse circumstances – create feedback loops to sovereign balance sheets. Moreover, these risks could cause spillovers that cross borders with greater frequency and force than before. Citing IMF research, she said that spillovers from emerging markets have increased in recent years.

Coordinated structural, fiscal and monetary measures

Despite the prevailing national and global challenges and increased fragmentation, Ms Lagarde emphasised the importance of more cooperation, saying that "the first priority must be to secure the recovery and lay the foundation for stronger and more equitable medium-term growth". For this, a number of actions in three areas of activity would be necessary: more specific structural reforms, more growth-friendly fiscal policies, and more support from structural and fiscal elements for monetary policy actions.

With regard to the necessary structural reforms, Ms Lagarde called for the commitments made by the G20 to raise global GDP by an additional 2% by 2018 to be advanced to 2016. There need to be specific reforms for each country, she said, and gave several concrete examples such as expanding the earned income tax credit, increasing the federal minimum wage, and strengthening family-friendly benefits in the United States. In the euro area she called for better training and employment-matching policies, and for commodity exporters she recommended increased diversification. These measures should be taken without further delay, Ms Lagarde emphasised.

Turning to fiscal policy, Ms Lagarde underlined that there is room to make it more growth-friendly in most countries. In particular, the efficiency of public spending needs to be improved. This, she added, can mean shifting spending from one area to another in which the returns are higher. Additional spending in infrastructure and innovation are further areas which offer great potential, she said. Referring to IMF studies, Ms Lagarde explained that a 40% increase in private research and development investment in advanced economies would lead to a 5% increase in GDP.

Speaking of monetary policy measures, Ms Lagarde referred to the invaluable role played by accommodative monetary policy measures in supporting the global recovery. She stressed, however, that monetary policy cannot be the sole contributor to recovery, adding that to be effective, the measures need the support of actions in the areas of structural reforms and fiscal policy.

Global challenges require global cooperation

Ms Lagarde called for “greater global cooperation” to address shared priorities, in particular in shoring up global trade, pressing ahead with financial regulatory reform and tackling climate change and corruption. As part of this global cooperation – she named the Financial Stability Board, the European Stability Mechanism and the G20 as examples of joint activities – Ms Lagarde underlined the importance of the IMF and the progress made so far in overhauling its surveillance and lending toolkits and in boosting its resources. Viewing these as elements of a “global safety net”, Ms Lagarde mentioned points that will need to be discussed in the coming months: the size of the safety net, improving access to it, and ways to increase its responsiveness to new challenges to the international monetary system.

Concluding her speech, Ms Lagarde quoted Goethe to underline her call to action: "It is not enough to know, we must also apply; it is not enough to will, we must also do."

Weidmann: IMF indispensable for rescue programmes

Ms Lagarde spoke at the Goethe University in Frankfurt at the invitation of the Deutsche Bundesbank in cooperation with the Research Center SAFE and the Center for Financial Studies. In his brief introduction of IMF Managing Director Christine Lagarde, Bundesbank President Jens Weidmann praised her as one of the world’s most influential people and thanked her for accepting the invitation to speak in Frankfurt. Speaking of the independent assessments provided by the IMF, President Weidmann highlighted their importance to the euro-area countries in combating the economic crisis in recent years.