IMF Managing Director Dominique Strauss-Kahn Sees Renewed Stability But Remains Cautious About Global Economic Recovery, Notes Need For Continued Policy Actions

Press Release No.09/295
September 4, 2009

International Monetary Fund Managing Director Dominique Strauss-Kahn, delivering the 2009 Bundesbank Lecture today in Berlin, said stimulus measures adopted to combat the global crisis should be withdrawn only when the economic recovery has taken hold and unemployment is set to decline.

While acknowledging that the global economy appears to be emerging from the worst financial and economic crisis in the post-war period, Mr. Strauss-Kahn emphasized that the recovery will be sluggish and that a jobless recovery remains a risk. “I am concerned about the social and economic costs of high unemployment, which will persist even as financial markets and output stabilizes,” he said.

Given the fragility of the recovery, he warned that “Policymakers should err on the side of caution as they decide when to exit from their crisis response policies.” He added, however, that governments should develop their exit plans now so that they are able to build public support and act when the time is right.

Mr. Strauss-Kahn underlined that international policy coordination has been an essential part of the response to the crisis and that "coordination of exit strategies will be just as important.” Thanks to concerted and forceful policy actions, the crisis had been contained, he said.

He focused on three policy areas essential to ensure a sustainable recovery:

1. Identifying New Sources of Growth

On the demand side, “the baton will eventually need to be passed from the public to the private sector,” he said. He also called for a global rebalancing of demand across countries, which would require strong policy actions--including fixing the financial system in advanced economies and boosting domestic spending in emerging Asia.

On the supply side, he called for reforms that boost productivity—by increasing labor market flexibility and competition in product markets. He also said that “advances in green technology could even become the microprocessor revolution of tomorrow—while at the same time helping address global climate change.”

On macroeconomic policies, he emphasized that “addressing concerns about fiscal sustainability is of the first order of importance”—including spending due to aging which is more than ten times the fiscal cost of the crisis. On inflation, Mr. Strauss-Kahn said that he did not expect it to become an issue until the recovery was firmly underway.

2. Reforming the Financial Sector

He expressed concern that the improvement in financial markets “is leading to complacency in dealing with remaining and difficult problems in the banking system.” He urged policy makers to remain focused on the crisis response agenda, which includes undertaking a comprehensive diagnosis of banking systems and launching asset-management programs to deal with banks’ bad assets.

On financial regulation, he cautioned that reforms are not proceeding as quickly as necessary. He called for increasing capital requirements and making them more sensitive to risk. He added that the operational framework for macroprudential supervision remains a “work in progress.”

With regard to financial sector compensation, he noted that a culture of risk-taking in major financial firms had been an important factor in the crisis, and he raised concerns that financial sector recovery could lead to “business as usual.” He said that the international community must “stand together to make meaningful progress in this area”.

3. Strengthening the International Monetary System

While noting that many proposals had emerged for reforming the international monetary system, he said that “the current system, despite its problems, is working better than is often said.” The U.S. dollar had actually strengthened during the crisis, which in his view “reflects the dollar’s status as an unrivaled safe haven asset.”

To make the international monetary system more stable, he emphasized that reducing countries’ demand for reserves and strengthening insurance mechanisms would be essential. The IMF could play an important role in this regard and ideas that could be explored include: making access to its funding more predictable; making Special Drawing Right allocations more responsive to global developments; and increasing the Fund’s resource base.



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