Transcript of a Press Conference on the International Monetary Fund’s 2012 Article IV Consultations with the United Kingdom

May 22, 2012

with George Osborne, U.K. Chancellor of the Exchequer, and
Christine Lagarde, Managing Director, IMF,
Ajai Chopra, Deputy Director, European Department, IMF, and
Olga Stankova, Senior Press Officer, External Relations Department, IMF
London, United Kingdom
Tuesday, May 22, 2012
Webcast of the press conference Webcast

CHANCELLOR OSBORNE: Ladies and gentlemen, welcome to the Treasury and I’m particularly delighted to invite Christine Lagarde and her team from the IMF for their annual Article IV assessment of the United Kingdom. Their scrutiny of our economy and the world economy is a vital part of the IMF’s role in supporting global stability.

Before I hand over to Christine to set out the IMF’s recommendations for the UK in detail, let me just say a few words about the economic position at home and in the Euro Zone.

The IMF could not be clearer today: Britain needs to deal with its debts and the government’s fiscal policy is the appropriate one and an essential part of our road to recovery. It enables interest rates to stay low, it means we can use the credibility we’ve earned for the government’s balance sheet to support lending to businesses, new housing, and more infrastructure.

I welcome the IMF’s continuing support for the UK deficit reduction plan. They agree that, in their words, “reducing the high structural deficit” remains essential and make clear in their statement that they consider the current pace of fiscal consolidation to be appropriate.

The OECD has also, this morning, backed our fiscal plan. Now, some have argued that events in the Euro Zone demonstrate that Europe, including Britain, should borrow and spend its way out of the debt crisis, but I very much agree with the point Christine Lagarde made a few weeks ago that the debate about deficit reduction versus growth is a false one.

This morning we had the news that inflation is down and within 1 percent of the Bank of England’s target falling from 3.5 percent to 3 percent. It means that for the first time since I became Chancellor, I have not, this morning, received a letter from the governor of the Bank of England explaining why inflation is off target. Indeed, it’s the first time since 2009 this has happened.

This brings welcome relief to families on tight budgets and the Bank of England expects inflation to continue to fall further over the next year or so.

Unemployment has also fallen this month, but it remains too high and we need to do even more to help.

The IMF explicitly welcomed today the government’s announcement last week that it will use the credibility of its balance sheet to go further, to boost credit for businesses, housing, and infrastructure. The IMF also identifies setbacks in the Euro Area as the key risk to the UK’s economic prospects and financial stability.

In the UK, we have a flexible exchange rate, an independent monetary policy, which allows us to ease the process of fiscal adjustment with a lower exchange rate and supportive monetary policy. The IMF has advice for the Bank of England on that today.

But in the eurozone, indebted countries have to deal with high budget deficits without that support. It’s clear we’re now reaching a critical point for the eurozone. The eurozone countries need to stand behind their currency or face up to the prospect of Greek exit with all the risks that that could involve.

The British government is doing contingency planning for all potential outcomes. It’s our responsibility to ensure that while we work for the best, we prepare for something worse. The IMF must also prepare for the consequences if members in Europe do not follow its advice.

Let me ask you all to welcome Christine Lagarde who will set out the IMF’s findings in much more detail and she will answer your questions afterwards. Thank you very much.

MS. LAGARDE: Well, good morning. Thank you very much, Chancellor -- dear George. I’m particularly pleased to be here in London on the day when the inflation number is announced, but I did not come for that purpose. I came for the conclusion of the IMF mission and the annual consultation that we do.

Just to give you a bit of background in terms of what exercise that is, it takes a team of more than seven members on a two-week mission and they spend those ten days, roughly, talking to multiple stakeholders -- officials, non-officials -- checking numbers, obviously, confronting views, and debating policies that have been in place and policy recommendations. So, it’s a very animated exercise that was conducted, as is always the case in the UK, in a spirit of excellent cooperation.

Now, as a global hub and as an island with a long trading history, few understand better the benefits of and cost of living in an interconnected world than the UK. The authorities also well understand the challenges and opportunities of policy choices in a world where what happens in one country affects all others.

It is therefore welcome that the UK authority’s policy approach has reinforced credibility at a time of intensified global uncertainty. The government is implementing strong fiscal consolidation to reduce fiscal risks. The Bank of England has been nimble in easing monetary policy to support growth.

The policy mix -- and just for one second, you have to appreciate that we do not examine or assess the validity of policy, but of policies and policy mix, which, to us, is really one of the reasons why this policy mix, in our view, has been good.

So, the Bank of England has been nimble in easing monetary policy to support growth, and this policy mix helps rebalance the economy towards investment and external demand.

And unfortunately, the economic recovery in the UK has not yet taken hold and uncertainties abound. The stresses in the euro area affect the UK through many channels. Growth is too slow and unemployment, including youth unemployment, too high. Policies to bolster demand before low growth becomes entrenched are needed.

I’m encouraged that Prime Minister Cameron recently emphasized the need to use the hard won credibility of the government’s balance sheet to help the economy grow. I’m also encouraged by the outcome of the G-8 Leader’s Summit last week and the leaders resolve to promote growth and jobs while supporting sound and sustainable fiscal consolidation policies. Hence, my position a couple of weeks ago in Zurich that the growth versus austerity is a stale and failed debate.

We should recognize that policy options in this regard come with risks. However, these risks need to be weighted against the risk of lost years of growth. To this end, further monetary easing is required. Underlying inflation pressure is weak and such easing should be consistent with inflation returning to the 2 percent target in a reasonable timeframe as is clearly indicated by the trend, if only this morning.

The slower pace of fiscal consolidation this year is appropriate. Indeed, the pace of structural adjustment this year of half a percent of GDP is below the annual average 2-percentage point pace in the two previous years.

Now, that’s an issue that is often understated or hardly ever mentioned, that the fiscal consolidation over the last two years has progressed at a rate of 2 percent per year, which was a very significant exercise, and thanks to the good decision that was made in November 2011, that pace of fiscal consolidation has abated to the rate of approximately half a percentage point of GDP this year, which is exactly the right way to address the current situation. So, therefore, the fiscal consolidation mechanism has embedded flexibility that actually allow for the slowing of the fiscal consolidation, and that is right.

But the quality of fiscal adjustment can be improved to provide support for growth, and this includes budget neutral shifts towards more infrastructure spending and measures to shield the poor.

If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered. Again, the measures would have to focus on supporting growth and encouraging employment. A delay in fiscal consolidation in these circumstances would be a good use of the hard won credibility of fiscal policy and institutions in the UK.

I should also mention that the UK had a financial sector assessment last year and that progress has been made since then to implement the recommendations. Some of that work including on systemically important financial institutions is still underway and I cannot stress enough the importance of robust regulation and supervision for a global financial hub such as the UK, whose stability and soundness is indeed a global public good.

I would like also, in conclusion, to express my thanks to the authorities for their contribution of additional lending to the IMF resources to help strengthen the global economic and financial stability in the interest of all our members, and the very courageous stand of Chancellor Osborne has been extremely appreciated in that regard in trying to strengthen the ability of international institutions, such as the IMF, to protect stability overall.

Again, thank you very much to all the authorities, the Treasury, indeed, the Bank of England, and the Financial Services Authority, for their cooperation and the good spirit in which this work has been concluded.

Now, I’m sure you will have some very pressing questions. I’m going to go back and sit at the table and for those questions that are highly technical and terribly complex, I have the great support of the mission chief sitting next to me.

QUESTIONER: I just wanted to have a question about paragraph nine on the other options to boost the demand through credit.

The Bank of England has always been very opposed to doing things like LTROs and has said repeatedly that it doesn’t think it should do that, and also purchasing private sector bonds. Given that the bank has been rather firm in saying that it won’t do this of its own accord, how do you expect the British authorities -- how do you recommend the British authorities should actually go ahead with doing this -- meeting this recommendation?

MS. LAGARDE: Well, my understanding from the team -- but I will let the team express additional views -- is that it would not be done by the Bank of England carrying the risk on its own balance sheets, but it would be with the Bank of England acting as agent on behalf of the Treasury. So, that’s the approach that would be acceptable. Is that right?

MR. CHOPRA: That’s absolutely right. What we are trying to get at over here is that high funding costs are constraining the availability of credit to the economy, so in this contextany policies that lower these funding costs would be very valuable.

The way these are designed should be specific to UK circumstances, and as the Managing Director just said, and as we say in our statement, the point is to utilize the government’s balance sheet to do this, so what we’re proposing is that if this is pursued, the instruction would be that the Bank would act as the agent of the government to purchase private sector assets.

I think the additional point I would note over here is that there has been experience with these schemes here in the UK in the past with the SLS, the CGS, and so on, so it’s a matter of designing schemes that are appropriate for the UK circumstances.

QUESTIONER: Madame Lagarde, clearly one of the biggest risks, if not the biggest risk facing the UK, is the Euro crisis at the moment, and the Chancellor said in his remarks that the Europeans or the eurozone needs to stand behind its currency or face up to the prospect of a Greek exit.

Would you echo those words? And what would be -- what’s your current advice as to what the Europeans need to do to try and sort out this crisis?

MS. LAGARDE: Well, I would, first of all, acknowledge the work that has been done by the members of the eurozone. I’m of two minds, in a way, when I say that because I was a participant myself in my previous incarnation to significant improvements in the governance, in particular of the eurozone.

Now, in addition to the governance changes, they have clearly gone beyond by, number one, clearly expecting some of the nations to do very, very serious technical adjustments, structural reforms, fiscal consolidation. I’m, here, thinking of countries such as Spain and Italy, that both have gone into very, very strong programs of their own, if you will.

Second, they’ve also decided on the 30th of March to actually build a more serious firewall than the EFSF was in the past, and this is clearly work in progress and it is good.

Third, the European Central Bank has gone into completely different policies by way of expanding the collaterals, by cutting the interest rates several times, and clearly by going into this long-term refinancing scheme.

So, all of that together is a serious improvement relative to the pre-crisis situation, but we consider that more needs to be done, particularly by way of fiscal liability sharing, and there are multiple ways to do that. More needs to be done in relation to supporting growth, particularly by way of structural reforms, certainly not by way of, you know, suggested stimulus because we do not think that the fiscal position of the member states can actually bear that on an aggregate basis.

So, there is still, you know, work under way, but we certainly hope that the monetary zone that has been built for the last ten years will continue to be developed, to be strengthened, and that the political will of the members will actually be conducive to that effect.

QUESTIONER: Good morning. You said that if the economy weakens further, the authorities should consider fiscal stimulus. And one way or another, the IMF has been saying this for nearly two years. It’s always supported the fiscal stance of the government, but said there were risks, and if those risks materialized, you might have to consider a different path.

Every time it said that, the risks have then materialized, the forecasts have been reduced. Since last year, the growth forecast for this year has been more than halved. So, I’m just wondering -- you know, how much worse does it have to get for you to feel that enough downside risk has materialized?

MS. LAGARDE: Well, you know, ever since we’ve said that, measures have been taken, if you look at it, and that was my point about the policy mix because it would be, actually, shortsighted to exclusively look at the fiscal policy. And I’m not suggesting that you are at all, but we look at the policy mix, and what has been done by the Bank of England, in particular, to use the monetary tools that are available to actually facilitate and ease financing to provide liquidity, are the measures that were to be taken and they were taken in due course.

Similarly, the decision that was made by the UK government in November to not add to the fiscal consolidation measures despite the fact that the structural fiscal deficit had been reassessed was the right decision and as a result has produced half a percentage point of structural fiscal consolidation in 2012/13 as opposed to the two percentage points that had been sort of, you know, harvested in the two previous years.

So, the decelerated consolidation was exactly appropriate, and the monetary policy tools that were used, were also the appropriate measures. What we are saying now is that there are more tools that can be used from a monetary policy point of view and we have discussed that extensively with the Bank of England. We believe that it has quantitative easing measures available that could be resumed, number one.

We also believe that there is, you know, room in terms of interest rates that could be used as well prior to considering the improved fiscal consolidation at budget neutral basis, in addition to the measures that were just commented about, which are really to use the government budget and the extremely favorable financing terms under which it borrows today to actually try to support the economy by facilitating the financing of SMEs, by facilitating the financing of households in order to stimulate the economy.

Because, you see, the gain that resulted from the fiscal consolidation that was decided over two years ago has been that result, the credibility of the UK government and its ability to borrow at extremely favorable rates. I mean, it’s -- you know, sometimes you feel like you could look back and wonder what if and when I think back myself of, you know, May 2010, when the UK deficit was at 11 percent and I try to imagine what the situation would be like today if no such fiscal consolidation program had been decided. I shiver.

QUESTIONER: But you have done a lot of analysis, and the IMF has done a lot of analysis in the last two years in Europe as well on the impact of fiscal consolidation, on fiscal cuts, on growth.


QUETIONER: Has the staff’s view of the impact of this consolidation, the last two years, of the cuts of the first two years of the government changed compared to two years ago because of what’s happened? Do you think that that’s had a larger impact on growth than you might have expected two years ago?

MS. LAGARDE: I’ll tell you something, as I said, the main -- there is no question that fiscal consolidation has affected, affects and will affect growth as a general principle, but there is no question, either, that the fiscal consolidation measures that have been adopted across Europe have actually improved the credibility of the governments that have decided them, in due course, and that is obviously the case with the UK.

What we have said, and, you’re right, we’ve conducted a lot of research and analysis -- what we have said consistently is that the fiscal consolidation is not a matter that can be decided across the board in a one-size-fits-all principle, but that it has to be tailored to the specificities of each and every economy.

Now, what we see at the moment throughout Europe is that it is broadly appropriate, broadly appropriate under the present circumstances and in the current outlook. And there is no question that some countries have to take, you know, front loaded measures and they have because the financing pressures are such that they just have to resort to that.

QUESTIONER: In paragraph 13 you refer possibly to --

MS. LAGARDE: Paragraph 13, you say?

QUESTIONER: I think it’s paragraph 13. You refer to the possibility of temporary tax cuts and I just wondered what areas you might consider were appropriate if the government were to take that course?

MS. LAGARDE: You know, I’m going to give the floor to my colleague, but generally when you do that you try to focus on the tax cuts that will produce the higher or the highest possible multiplier effect, so I’m going to turn to my technical expert here who’s conducted the mission, who knows that much better when it comes to the specificity of the UK economy.

MR. CHOPRA: I think the sorts of measures that we have in mind are to consider cutting the value-added tax, one could consider the payroll contributions, because these can be credibly temporary. The emphasis here is on temporary, and those are the sorts of measures we have in mind.

QUESTIONER: Again, on this same point, on point 13, at what point does the deterioration -- at what point should this action kick in going forward? Is it another quarter of recession? Is it growth below your own forecasts, below the government’s forecasts? When should we have this extra fiscal action that you are calling for here?

MS. LAGARDE: Well, you know, I don’t have a present either term or threshold or deadline because, as I said, it’s always country-specific and it’s a matter that is really assessed on the basis of the entire environment, the demand that is addressed to the country, and it’s really at a time when it falls significantly below forecast that we think that measures should be adopted.

But as I said, just bear that in mind because there’s a lovely tendency to focus on paragraph 13. Now, it so happens that there are, what, 17? -- 17 paragraphs, so I hope that you don’t exclusively focus on that one, which is, in our view, the sort of fourth in the line of possible additional or new policies that should be considered.

QUESTIONER: Madame Lagarde, I’m wanting to go to your least favorite subject. Do you think that the financial system, especially the eurozone, can afford a Greek exit? Have you quantified the damage from a possible Greek exit? And if, for the sake of government, Greece remains in the Euro Zone, do you think that it can keep on going without an official sector haircut? Have you considered that?

MS. LAGARDE: Well, it might not be one of your favorite answers since it’s not one of my favorite questions, and I will simply tell you that, you know, the clear preference of the IMF in the interest of stability is that appropriate implementation of the program be endorsed by whoever are the political forces that will result from the election on June the 17th and that those political forces will engage in a constructive dialogue with both the Euro Area partners as well as the IMF in order to proceed to that implementation.

Now, failing that, obviously, as I have mentioned in the past, the job of the IMF is also to look at all possible technical options and all possible alternatives and this is what the IMF has to do.

QUESTIONER: Madame Lagarde, I’d like to return to the fiscal easing suggestion.

MS. LAGARDE: Paragraph 13 yet again.

QUESTIONER: Paragraph 13, unlucky for some. The apparent contradiction between your suggestion that there may be cause to ease back on cuts that there are in the UK and the OECD this morning saying that there is no room to ease back -- how would you explain that contradiction?

MS. LAGARDE: The passing of time. Well, I just said it. You know, you either analyze the situation, you know, in a particular -- at a particular time, which is probably what the OECD is doing. What we do, because we come annually, is we review what has been done in the last year, what the policies have been, what the results have been, what the inflation forecast is, so on and so forth, and then we try to consider what is likely to happen in the future and we make some recommendations, hence that sort of four different steps and four policies that we’ve identified as possible options depending on circumstances.

But we don’t always agree with the OECD. We respect each other enormously, but we don’t necessarily look exactly at the same timeframe in particular.

QUESTIONER: The question is whether you agree with the leaders and officials warning that the Greeks will effectively be voting on their Euro membership on the 17th and whether, if a democratically elected government comes and asks you for renegotiation on the fiscal program, what will your reaction be?

MS. LAGARDE: Well, the first thing I would say is that whatever the government democratically elected by any of our members, we engage in discussions, always, and the IMF never leaves the table, never.

Equally, we abide by the principles, we are a rules-based institution and there is no reason why any particular member in any particular zone would have the benefit of different principles, different policies, and different rules.

So, we have to operate within those two parameters. We always engage in discussions with democratically elected governments, legitimate institutions, if you will, but on the other hand we apply the same principles and we don’t discriminate, neither favorably or unfavorably with any member.

So, if any democratically elected government in Greece has better ideas how to reach our targets, our objectives, than what we have put in place, and you know, very seriously, thoroughly, explored and negotiated with the then in place authorities, we’ll be very pleased and interested to hear about it, but there is a huge productivity gap. There is a competitiveness issue. There are structural reforms that need to be put in place. There is tax collection that has to happen.

QUESTIONER: After two and a half years, the memorandum in Greece shows that doesn’t work. The Greek economy is worse and, more importantly, the Greek people are worse than ever. So, have you ever thought that probably the memorandum is not in the right direction to sort out the mess in Greece? And, if yes, are you thinking to do something about that, to change probably? Thank you.

MS. LAGARDE: Well, first of all, I’d like to say that under previous governments -- government, particularly -- but both under the government of Mr. Papandreou and the government of Mr. Papademos, massive efforts have been undertaken and the fiscal consolidation that has taken place in Greece is very remarkable.

Second, you know, you just have to look at the numbers and there is still work to be done, and there is still efforts and implementation to be had. The structural reforms have to be implemented. Taxes have to be collected. The civil service has to be improved in its efficiency. There’s a lot to be done, and whether it’s under a memorandum that is heavily criticized and often used as the scapegoat, or whether it’s under any other regime, the same reforms will have to be made.

MS. STANKOVA: Do we have a question on the UK? Yes, please.

QUESTIONER: I noticed that there’s no mention of the word recession in this document. I was just wondering if you could explain a little more why that is despite the fact that the ONS, in its most recent estimates, said that the UK actually is in a double dip. Is this because the IMF believes, along with some other forecasts that the actual situation is not as bad as the official figures are showing? Or is it some other reason?

MS. LAGARDE: Well, official numbers are very often revisited and revised, either upwards or downwards, and we try to take a bit of a longer-term view and we do not necessarily focus on two quarters numbers or sort of preliminary numbers. We try to look at the sort of annual forecast. We will be revisiting our forecast, by the way, in July of 2012. But, yes, our latest forecast for 2012, in particular, does not mention recession for a good reason, because we don’t see a negative number for 2012.

Do you want to add something?

MR. CHOPRA: No. Perfect.

MS. LAGARDE: All right. Thank you ever so much.


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