Interview by Les Echos with Christine Lagarde, Managing Director, International Monetary Fund“France must move from words to deeds”
September 8, 2014
This is a translation by the IMF of the original interview, which appeared in French.
With one month to go until the IMF Annual Meetings, what is your outlook on global growth?
Economic growth is too weak, fragile and uneven. It is too weak to create jobs, as we are constantly reminded by the 200 million jobless worldwide. We are currently updating our forecasts. Global growth is expected to increase by just over 3 percent this year, between 3 and 3.5 percent. Growth is also fragile because of the many geopolitical risks. The crisis in Ukraine is having side-effects on Russia and on neighboring countries, particularly those that belong to the German value chain, and whose trade, energy and financial links are being affected in varying degrees. The impact of these effects remains to be quantified precisely, and depends on the implementation of a peace plan. The risks posed by the situation in the Middle East are just as real for the global economy. Furthermore, growth is uneven because certain countries are experiencing a stronger recovery than others. That is the case with the USA and the United Kingdom.
Does that mean that the risk to growth is primarily a geopolitical one?
There is a second risk contributing to financial instability: we are seeing a very high valuation of certain assets. I am not saying there is a bubble, but the semiannual Global Financial Stability Report to be released next month will discuss the need for greater attention on the part of supervisors and regulators. I am not referring to just stock market shares, but also certain bond issues. If, at the same time, some central banks decide to tighten their monetary policy more abruptly or quickly than the markets expect, then the risk of financial instability would become a real cause for concern. Although we are not on alert yet, we should keep a very close watch on the situation. That is why the very clear language used by Janet Yellen is so important.
Is Europe under threat of deflation? And, are the measures announced by the ECB last week well-suited to address the situation?
I have never used the word “deflation.” The Fund simply refers to it as persistently low or even very low inflation. There were sound reasons to take action, and these reasons were duly heeded. The President of the European Central Bank announced actions in the right direction that will allow for greater flexibility in corporate borrowing capacity. These measures came as a surprise, which is not a bad thing because they led to a decline in the euro against the dollar.
Is the euro overvalued against the dollar?
We do not think that the euro is overvalued against the dollar. Its value is consistent with the euro area balance of payments. However, the direction in which it is headed today is likely to boost recovery, and that is a good thing.
Is the ECB’s plan sufficient in scope to revive growth in the euro area? Is it not coming too late?
The ECB has done a lot over the past two years. We commend the ECB on its readiness to use additional unconventional measures should they become necessary in order to address the risk of an overly prolonged period of low inflation. If we take a look at the timeline, we have been drawing attention to the risk of excessively low inflation for some months now.
It is sometimes difficult to monitor developments in the IMF’s fiscal and monetary recommendations. Is there too much austerity in the euro area? Do concessions need to be made?
This is a red herring at the moment. This year, fiscal consolidation in the euro area is limited to 0.3 percent of GDP. It would not be accurate to say that a policy of excessive austerity has been in place within the euro area. Much has already been accomplished in the euro area, and we feel that the pace of fiscal deficit reduction today is appropriate to each country.
Nonetheless, you had some strong words for Germany, which might be perceived as failing to play its role as the driving force to stimulate European growth…
No-one is asking the German economy to be less competitive, needless to say. Yet Germany most probably has the fiscal space to support the European recovery and is offering to use it. We think that public and/or private investments aimed at financing infrastructure would be welcome. I am not talking about creating new highways, but rather about investments in maintenance and upkeep; for over the past few years, Germany has invested very little in its transportation infrastructure. Just like in the United States, the network is deteriorating, which makes stepping up efforts perfectly justifiable. Germany intends to earmark 0.2 percent of GDP for these efforts over the next four years. We think that Germany could dedicate an additional 0.5 percent of GDP annually over four years, according to the Fund’s analysis. Germany could also contribute to the European recovery with greater wage distribution. This would enable German consumers to fuel recovery. Given the favorable labor market conditions, we expect wage dynamics to move in that direction. These developments would likely support activity in Europe.
Should the pace of deficit reduction be slowed, as France is planning on doing?
It is important to stay the course on reducing public spending. Even if inflation is lower than anticipated, it cannot be used as a smokescreen to put off the necessary efforts on spending. Nor should the situation justify new tax hikes; low income due to exceptionally slow growth should not encourage a country to introduce stiffer taxation in order to achieve a nominal target. Bear in mind that the path of fiscal consolidation is not a terribly difficult one. If the reduction in public expenditure is largely offset by tax breaks, as France is contemplating doing, the effect on demand remains manageable.
Aside from austerity measures, how can growth be stimulated?
There are three ways to do this, through monetary policy, structural reforms, and fiscal policy. We have already mentioned the ECB’s monetary policy. The priority is to reform the services market—in particular, to open up a number of activities that are too closed off, or too protected. Liberalizing regulated professions in France is not necessarily the easiest route to take, but I am pleased that this door has been opened. What needs to be done, first and foremost, is to break the shackles of labor regulations—and I do not mean just in France, but in the entire euro area. The only country making headway in this regard this year is Spain. It introduced a number of structural reforms, and they are beginning to pay off. The only reason that I am putting fiscal policy in third place is because the pace of fiscal consolidation as announced should be maintained, subject to the flexibility allowed by the Stability and Growth Pact. Note that the required effort is 0.3 percent of GDP in the euro area because much has already been done, including by France for that matter.
Are you concerned about the prospect of France deferring its 3-percent deficit target until 2017?
That does not worry me, provided growth-enhancing structural reforms are truly, rapidly, and comprehensively implemented. It pleases me to hear that France plans to move forward by executive order to speed things up. Anything that is likely to accelerate the implementation of genuine, substantial reforms is a move in the right direction. It is now time to “deliver” as the Americans would say, or put another way, to turn words into action.
The IMF’s governance reform, which would more effectively integrate emerging market economies, continues to be rejected by the U.S. Congress. How do you expect to break this deadlock?
We cannot implement the reform without the U.S. Congress. Even so, all the G20 countries backed this reform and even the U.S. pushed for it vigorously at the time. We were supposed to implement it in 2012, but the U.S. is two years behind. There is a sense of weariness when it comes to the U.S., which has veto power over the current governance reforms. And, believe me when I say that this weariness is not coming solely from emerging market economies!
Is your recent investigation by France’s Court of Justice of the Republic likely to weaken your position as head of the IMF, or the IMF’s authority over the member countries?
The IMF’s Executive Board, which represents 188 countries, has been unwavering in its total, unequivocal support for me. I have also received warm words from many heads of state or government, as well as from former colleagues. If there was ever any doubt in my mind about my ability to carry out my duties effectively, it would have been erased by these expressions of support, and I am fully focused on discharging my responsibilities at the helm of the IMF. My lawyers, in turn, are actively pursuing all possible avenues of appeal.