Promises to Keep: The Policy Actions Needed to Secure Global Recovery

IMF News, September 24, 2012

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Authors: Christine Lagarde
Published: September 24, 2012

Introduction & Global Outlook

Speech by Christine Lagarde, Managing Director, International Monetary Fund, at the Peterson Institute for International Economics, Washington DC, September 24, 2012.
Main message: the urgent need to implement the policy actions required to secure the global recovery; “we have promises to keep.”
Recent central bank initiatives cited as positive policy signals: the European Central Bank’s OMT bond-purchasing program, QE3 by the U.S. Federal Reserve, the Bank of Japan’s expanded Asset Purchase Program.
IMF view on current global trajectory:
- Project a gradual recovery, but global growth will likely be a bit weaker than anticipated in July; forecast has trended downward over the last twelve months.
- Central problem: uncertainty about whether policymakers can and will deliver on their promises.
- Real effects of uncertainty: increasing divergence in the Eurozone; a tepid recovery in the United States; slowdown in emerging markets; concern in low-income countries about rising food prices and volatile commodity prices; growing frustrations across the Middle East.
Lasting legacies of the crisis highlighted:
- Lasting scars of unemployment, especially among young people and in countries like Greece and Spain.
- Lasting burden of high public debt—“now at levels rarely seen since the Second World War.”
- Lasting costs of a poorly functioning financial sector; “Despite real progress, not yet” safer.

A. Challenges Facing Europe and the US

Europe: identified as the epicenter where the most urgent action is needed.
- Need for a strong and effective banking union to break the vicious cycle between banks and sovereigns.
- Euro area leaders must deliver on June 29 commitments—establishing a single supervisory mechanism and enabling the direct recapitalization of banks.
- Other consistent calls: implement the European firewall (notably the European Stability Mechanism); implement the agreed plan for fiscal union; implement country-level programs for growth, jobs and competitiveness.
- IMF position on program design and support:
- Favorable consideration for timely and flexible support: slowing the pace of fiscal adjustment where needed; focusing on measures rather than targets; emphasizing growth alongside fiscal consolidation.
United States: a major risk with immediate fiscal concerns.
- Current law implies a dramatic tightening of the deficit by about 4 per cent of GDP next year—risk of plunging the country off a “fiscal cliff.”
- Such tightening could reduce growth by as much as 2 percent.
- Failure to reach a deal on raising the debt ceiling could also force a dramatic tightening.
- IMF call: political clarity and action to avoid the fiscal cliff and a concrete plan to bring down debt gradually over the medium-term.
Overarching recommendation: coordinated implementation across multiple players—“multiple players playing one game.”

B. Challenges Facing the Rest of the World

Emerging markets:
- The illusion of “decoupling” has vanished; major emerging markets are slowing.
- Policy advice: position themselves as future global growth leaders by countering vulnerabilities (domestic or external); in some cases pause monetary and fiscal tightening or provide additional stimulus (example: China); ensure high credit growth does not compromise financial stability.
- Prepare for potential spillovers from other parts of the world.
- IMF instruments available: Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL); examples of users: Colombia, Mexico, Morocco, and Poland.
Low-income countries:
- Performed relatively well through the crisis but are more exposed to shifts in economic fortune and to slowdowns in emerging markets.
- Food price concerns:
- 20 percent increase in global food prices since June.
- Prices of maize and wheat increased by 25 percent in July alone.
- Countries reliant on imports of these grains, such as Lesotho (also hit by drought), are especially vulnerable.
- IMF advocacy: continued quality policies and increased international support, including ensuring sufficient financing for the IMF’s concessional lending via the Poverty Reduction and Growth Trust (PRGT).
Middle East transitions:
- Transitioning through regime change is historic and difficult; requires time to formulate strategies, build consensus, and begin inclusive growth and employment.
- External support needed: financial assistance, FDI, market access, and technical assistance.
- Concern that many members of the Deauville Partnership have yet to deliver at anticipated scale.
- IMF commitment: advice, technical assistance, and financing—“We have already committed more than $8 billion to three countries.”

C. Challenges Facing the IMF

Need for the Fund to adapt to better serve changing global membership; three priority areas highlighted:

1. Strengthening surveillance to focus on global stability:

Upgrades include:
a new Decision for deeper analysis of spillovers and cross-border effects;
a new External Sector Report to sharpen assessment of countries’ policies from a multilateral perspective, including exchange rates;
much greater focus on analysis of the financial sector.

2. Strengthening the global financial safety net and the Fund’s firepower:

Recent support: 37 countries making an exceptional contribution of 456 billion dollars in support of the IMF.
Ongoing effort to augment resources to support low-income countries via the PRGT.

3. Strengthening governance to reflect changing membership:

2010 reforms represent the most significant governance changes in IMF history:
increasing the quota shares of dynamic emerging and developing countries by a further 6 percent, totaling 9 percent since 2006;
ensuring all the BRIC countries will be in the top ten Fund shareholders;
creating—for the first time—an all-elected Executive Board.
Reform status and targets:
Exceeded the 70 percent of consents required for the quota increase.
Very close to reaching the 113 countries required to approve the Board reform—hope to achieve that goal by Tokyo.
Pushing to get the 85 percent of voting power needed for the Board reform.
IMF aim: reach final agreement on the whole reform package by the time of the Annual Meetings in Tokyo or as soon as possible thereafter.

Policy Imperatives & Collective Promise

Immediate policy imperatives:
- Deliver on commitments at domestic, regional, and multilateral levels to reduce uncertainty and lock in a sustained rebound rather than a temporary bounce.
- For Europe: implement banking union, firewall measures, fiscal union commitments, and tailored country programs with growth orientation.
- For the United States: avoid fiscal cliff and reach medium-term debt reduction plan.
- For emerging markets: manage vulnerabilities, calibrate stimulus or tightening appropriately, safeguard financial stability.
- For low-income countries: protect against food price shocks, ensure continued quality policies, and secure sufficient concessional financing.
- For the Middle East: provide coordinated external support—financial, FDI, market access, technical assistance—to enable successful transitions.
- For the IMF: complete governance reforms, enhance surveillance and spillover analysis, and maintain adequate resources—particularly for the PRGT.
Collective promise: strengthen international cooperation, place broad global interest above narrow national interest, and restore certainty and confidence to support a global recovery.

International Monetary Fund — Promises to Keep: The Policy Actions Needed to Secure Global Recovery, Christine Lagarde, September 24, 2012.