International Monetary Fund
- Managing Director Christine Lagarde, “The Path Forward — Act Now and Act Together“
We meet at a pivotal moment. A moment of choice. As we gather inside this hall, the mood outside is grim. All across the world, people worry more and more about their futures—and their children’s futures. They are looking to us for solutions. As Victor Hugo once said: “Great perils have this beauty, that they bring to light the fraternity of strangers”. We are by no means strangers, and we are linked by a common destiny. And these turbulent times must bind us ever closer together. Depending on the choice we make today, and in the weeks and months ahead, our collective economic fortunes will advance or fall back. We need to act now, and we need to act together.
You have seen our forecasts released earlier this week. Overall, we expect global growth to slow to 4 percent this year and next. But the advanced economies will only manage an anemic 1½ -2 percent. So, there is a recovery, but it is weak and uneven. And risks have increased sharply. They are propelled by a negative feedback loop—between weak growth; weak balance sheets among sovereigns, banks, and households; and inefficient political commitment. This has led to a crisis of confidence. And it imposes not only economic, but also social costs. Yes, the emerging-market and low-income countries are doing better, harvesting the fruits of sound policy choices. But make no mistake: the global south is not immune to missteps in the global north.
We have entered what I have called a dangerous new phase. And yet, there is a way forward. The policy options have narrowed, but that does not mean there are no options.
What do we want? Inclusive, job-creating, growth must be our goal. But today, we risk losing the battle for growth. With dark clouds over Europe, and huge uncertainty in the United States, we risk a collapse in global demand. This challenge could not be more urgent. In our interconnected world, we are all on one boat. Any thought of decoupling is a mirage. But let us be frank—the primary burden of responsibility for addressing the current crisis lies with the advanced economies.
I see three policy imperatives for them—fiscal and monetary, financial, and structural.
Fiscal policy must navigate between the twin threats of undermining credibility and undercutting recovery. Advanced countries need fiscal consolidation as a matter of priority, but, for some, pushing too fast will harm growth and jobs. So the pace must neither be too hesitant nor too hasty. It is less a dilemma than a question of timing and confidence. If countries have solid measures to anchor savings in the medium and long term, they can do more in the short term to accommodate growth. The amount of available space depends, of course, on country circumstances.
As for monetary policy, given that inflation expectations are generally well anchored, it should remain accommodative. And central banks should stand ready to dive back into unconventional waters as needed—as some have done in recent days.
Turning to the financial sector, we must strengthen banks’ balance sheets so that they can lend to fuel growth and adequately face uncertain times with confidence. We also need stronger consistent and implementable financial regulation, to make the system safer and sounder—to make financial crises less likely, and to make taxpayer bailouts of reckless operators less likely still.
To boost competitiveness and growth, advanced economies must continue with structural reforms: in product and labor markets—and confront vested interests in service sectors, to allow entrepreneurs to flourish and grow and create value.
We must also pay close attention to the social dimension. Growth alone is not enough. We need growth that supports jobs—we must not lose this generation of young people. We need inclusive growth that benefits the whole of society. We need decent social safety nets.
This is the policy path. And the world’s largest economies—the United States and the Eurozone in particular—have a special responsibility. They have begun the effort. It must be accelerated as a matter of urgency. The United States must reduce its fiscal deficit over the medium and long term, deal urgently with unemployment, and relieve pressure on overly-indebted households. Europe must deal urgently with the twin problems of sovereign and bank debt, and deal with them together. The countries at the heart of the crisis must implement the programs to which they have committed. And their European partners must do whatever it takes to support them—as they have committed to do.
New York Times
- Liz Alderman, “Mme. Lagarde goes to Washington“
In the few short months since becoming the first woman to lead the monetary fund, Ms. Lagarde, 55, had taken her former European colleagues to task for not talking with a single voice to save the euro. In speech after speech, she had warned that the austerity that Europe was pressing on Greece and its debt-weakened neighbors was choking economic growth and needed to be tamed.
Worse, as far as the men seated in the room were concerned, Ms. Lagarde was partly responsible for the collapse of confidence bedeviling the financial markets. She had dared to state what few of them would admit publicly: European banks were not as sheltered from this storm as they might seem.
Wall Street Journal
- Bob Davis & Sudeep Reddy, “Economic leaders warn of a ‘red zone’” (no link)
Russian Finance Minister Alexei Kudrin said that the G-20 “doesn’t have a clear, coordinated position. Most importantly, everyone sees the risks in the same way. But there are still some differences.”
Japanese Finance Minister Jun Azumi: “Concerns about Europe’s growing fiscal debt problems . . . are largest causes of global financial insecurity.”
PIMCO co-CEO Mohamed El-Erian: “It’s like an orchestra with two sides, each playing different music and looking to the conductor—and there is no conductor”
- Wolfgang Munchau, “Zero hour for the euro“
The debate has focused entirely on what cannot be done rather than what can – no eurozone bond, no monetisation, no bail-out, no break-up, no this, no that. As the world is discussing the next crisis resolution steps, the European authorities are still struggling with the implementation of the ratification of the rather minor changes to the EFSF agreed by the European Council on July 21, or the perverse debate about Finland’s request for collateral. European policy has been constantly lagging behind.
This will continue. On Thursday, the Bundestag will vote on the EFSF. In October, it will vote on the next loan tranche for Greece. In the new year, it will vote on the European Stability Mechanism, the successor to the EFSF. By then it may have to vote on a third Greek programme, as the second, not yet ratified programme, is already hopelessly out of date. There may be second programmes for Portugal and Ireland as well. Each, of course, will require a separate vote in Bundestag.
- John Kornblum, “Without the euro, would Europe have turned to war“
For the fathers of the euro, the end of the Cold War in 1990 was a time for worry as well as celebration. As they looked to the future, they were also obsessed with the continent’s bloody past. Would a new Europe, and especially a reunified Germany, reawaken old nationalist sentiments and lead again to the danger of war?
Germany’s Helmut Kohl and France’s Francois Mitterrand — and just about every European leader since — saw a common currency as essentially a political project, meant to cement European unity and remove that danger. For them, a world without the euro would have been a world increasingly threatened by conflict and perhaps even war.
Because of these fears, the euro project was rushed through without key agreement on the common political institutions that would have turned Europe into a truly unified economic zone.
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