"The Interconnected Global Economy: Challenges and Opportunities for the United States—and the World" By Christine Lagarde, Managing Director, International Monetary Fund

IMF News, September 19, 2013

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Canonical URL: "The Interconnected Global Economy: Challenges and Opportunities for the United States—and the World" By Christine Lagarde, Managing Director, International Monetary Fund

Speech delivered to the U.S. Chamber of Commerce, September 19, 2013.
Theme: interplay between the global economy and the U.S. economy in an era of increasing interconnections; focus on current global conditions, the U.S. role, and the IMF’s role.

Global growth: signs of recovery, but overall growth remains subdued; many economies moving at different speeds and with uneven distribution of growth benefits.
Advanced economies: in a better place than six months prior; Euro Area beginning to grow; Japan improving due to aggressive policy support.
Emerging market economies: still dynamic, but momentum is slowing—sometimes reflecting needed rebalancing, and other times exposure from previous imbalances.
Interconnections highlighted:
- World trade volume since 1980 increased fivefold.
- World exports relative to output: grew from 20 percent in 1995 to 30 percent in 2008, then fell during the Great Recession and recovered somewhat since.
- Global capital flows by crisis time were more than triple their level in 1995.
- IMF ‘spillover’ analysis: if the world’s five major economies adopt a more rigorous, comprehensive and compatible set of policies, it would increase global GDP by about 3 percent over the longer run.
Political/economic coordination points from G-20: orderly and clearly communicated exit from exceptional monetary support; emerging markets need to address domestic challenges to manage spillovers.

U.S. recovery: picking up but still modest—“still well below 2 percent” for the year noted; should accelerate next year “by about one percentage point.”
U.S. fundamentals improving: households lowered debt; recovery in house prices; strong stock market performance; housing sector with potential for more construction; private sector as primary engine of growth.
Labor market: unemployment rate declined to 7.3 percent in August; participation rate continuing to decline; employment remains well below pre-crisis levels.
Key vulnerabilities and two-way spillovers:
- Example of crisis transmission: collapse of one U.S. bank five years earlier precipitated global effects, exposing tensions in Europe.
- U.S. exposures to Europe: 20 percent of U.S. exports destined for Europe; more than half of U.S. overseas assets held in Europe.
U.S. global shares and ties:
- U.S. accounts for 11 percent of global trade.
- U.S. represents 20 percent of global manufacturing value-added.
- Tom Donohue/Chamber observation: 95 percent of potential customers live “outside the U.S.”
- Foreign banks hold about $5½ trillion of U.S. assets.
- American banks hold about $3 trillion of foreign claims.
- Close to half of the S&P500’s sales originate from foreign operations.
Main near-term drag: very large ongoing fiscal adjustment.

Fix public finances:
- Characterized as “slow down, but hurry up.” Recommend more action to reduce long-run pressure on the budget, including addressing entitlement spending and higher revenues.
- Resolve political uncertainty over the budget and the debt ceiling—“the earlier the better.”
Monetary policy:
- Exit from unconventional monetary policies should be gradual, linked to progress in the recovery and employment, clearly communicated, and conducted in dialogue.
Financial sector reform:
- Continue progress (e.g., Basle III capital and liquidity requirements) but address outstanding danger zones, especially derivatives and shadow banking.
- Aim for a financial system less prone to instability and better able to serve the real economy.
- Emphasize coordinated and consistent approach internationally, including resolution of international financial institutions.

Purpose and evolution:
- IMF founded to promote global economic and financial stability through cooperation; likened to “a credit union for the world.”
- Historical roles: assisted France as the first borrower; supported newly independent countries during decolonization; aided Eastern Europe after the Berlin Wall; helped members through crises in Latin America, Asia, and the Eurozone.
Crisis response during recent crisis:
- Significant increase in financial support, with over $300 billion in loans in over 50 countries.
- Introduced more flexible support types acting as insurance for crisis prevention; helped countries such as Colombia, Mexico, and Poland.
Analytical emphasis:
- Greater emphasis on global interconnections, economic spillovers between countries, and the financial sector.
Governance reforms:
- Working toward quota reforms to strengthen capacity to prevent and resolve crises and to broaden representation to reflect changing global dynamics; these “quota” reforms need support from all member countries, including the United States.

Global interconnections have grown substantially: trade and financial integration increased dramatically since 1980 and 1995 benchmarks.
A stronger U.S. economy supports global growth; conversely, global recoveries—especially in Europe and Asia—matter for U.S. prosperity.
Coordination among major economies could materially raise global GDP (about 3 percent over the longer run per IMF analysis).
Policy priorities for the United States include fixing public finances, calibrating monetary exit carefully, and completing financial sector reforms—with international coordination where relevant.
An effective, well-governed IMF remains important for crisis prevention, crisis resolution, and managing international spillovers.

Source: Speech by Christine Lagarde, Managing Director, International Monetary Fund, U.S. Chamber of Commerce, September 19, 2013.