Transcript of an Interview with IMF Managing Director Christine Lagarde with the Leading European Newspapers Association
IMF News, April 12, 2017
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- Published: April 12, 2017
Political uncertainty, elections, and protectionism
- Growth is picking up, including in Europe, but political uncertainties (including what Lagarde calls the “protectionist sword”) are a major concern.
- France:
- The uncertain outcome of the French elections matters because of France’s role and size in the euro area and because some ideas discussed could disrupt the EU architecture.
- “The sooner that uncertainty is removed, and I guess it will have to wait until May 7th, the better it will be for the global economy, and of course, for the euro area economy.”
- The fate of the euro is “clearly one of the debates” in the French presidential elections and affects confidence and stability in the euro area.
- United States:
- The Trump administration had been in place “for more than two month” at the time of the interview; Lagarde observes a “great discrepancy between the pre-election rhetoric and the actual steps that have been taken.”
- Her approach: focus on actual measures, policy determination, and implemented laws rather than speculation.
- At the G20 and in discussions with the US Treasury, she sees “the willingness to work together” and is “reasonably optimistic” that cooperation can clarify confusion and misunderstanding.
- Trade:
- Distinguishes between protectionism and the concept of “free, fair and global trade.” The IMF intends to discuss and define what is meant by “fair” at the IMF/WB spring meetings.
US fiscal expectations and global effects
- Expectations from an expected US fiscal stimulus and tax reform have raised market optimism and asset valuations:
- “Asset prices are at their highest in the last 8 years or so.”
- Outcomes remain uncertain: timing, implementation, spillovers to the real economy, and the magnitude of private-sector investment.
- Potential positive transmission if private investment and R&D financing increase.
Germany: external imbalances and investment
- Excessive external imbalances should be reduced, tailored to each country’s circumstances.
- Germany:
- Lagarde: “Yes” — Germany should do more and invest more in infrastructure for itself and Europe.
- Justified surplus: “4% would perhaps be justified, but 8 % is not.”
- Positive notes: Germany has begun investing (including refugee funding and infrastructure) and financially commits “0.7 percent of GDP to global development.”
- Recommendation: more investment, e.g., in broadband.
Greece: IMF participation, reforms, and debt sustainability
- Two dimensions for any IMF financing: short-term program alignment with ESM and the longer-term fiscal path for debt sustainability analysis.
- IMF stance and conditions:
- Any IMF participation would be based on fiscal path and the IMF’s debt sustainability analysis.
- “In the long term, we believe that a 1.5% primary surplus is sensible given all that the economy has gone through, and given the Greeks' capacity to reform.”
- If Europeans determine differently, that must be taken into account, but the IMF will not adopt unreasonable forecasts or unjustifiable macro frameworks.
- IMF participation is “plausible” if significant reforms are legislated and if debt is restructured to accommodate IMF debt sustainability rules.
- “The volume of our possible financial commitment is not going to be necessarily the most important contribution... It is more our discipline, our integrity, and our expertise... that is actually a greater value to Europeans.”
- Without debt restructuring that achieves sustainability “in accordance with the IMF’s rules and on the basis of reasonable parameters, we will not participate.”
- Lagarde: “There is no question in our mind that a degree of debt restructuring is needed.”
- Timing: IMF is taking additional time to secure “two legs” for the program—solid reforms and sustainable debt—so staff will return to Greece to negotiate and put agreements on paper.
Spain: recovery, labor market duality, and remaining vulnerabilities
- Spain has shown strong recovery momentum:
- “Spain has growth now; a growth momentum that is higher than anywhere else in the EU--except in UK perhaps--and certainly the highest in the euro area.”
- Remaining challenges and statistics (as cited in the interview):
- Unemployment rate at 18%
- Young unemployment rate at 40%
- Public debt at 100% and still growing
- High external debt and risk of poverty and lack of job stability
- Key issues and recommendations:
- Labor market duality (short-term exposed vs. long-term protected contracts) needs to be addressed.
- Continued reforms are essential; Spanish success owes much to determination on reforms, addressing banking sector instability and non-performing loans, and cooperation among ESM, the European Commission, and the IMF.
Eurozone resilience and deeper integration
- The euro area is better equipped than in 2008: presence of the European Stability Mechanism (ESM), strengthened supervision, and improved banking regulation.
- Remaining structural needs for resilience:
- A clear, efficient, and respected Stability and Growth Pact (more so than today).
- A common joint fiscal policy.
- The ability “to raise and manage debt on a euro basis” (Lagarde clarifies this is not a direct endorsement of Eurobonds and leaves details to European leaders).
- Progress toward completing the banking union.
- Concept raised: one day having a single Finance minister (as advocated by Jean-Claude Trichet).
- On further integration:
- If no “unpleasant surprise” from French and German elections, a move toward more integration would be consistent with the monetary union’s initial proposal, balanced with respect for national cultures and traditions.
IMF policy views and recommendations
- On excessive imbalances, inequality, and financial instability: all three are harmful to stability and sustainable growth; the IMF will call them out without moralizing language.
- Emphasis on cooperation and demonstrating the benefits of cooperation at international forums.
- On fiscal coordination in the euro area:
- Question posed: why not agree on a global fiscal impulse of 0,5% of GDP in 2017 as recommended by the IMF and the European Commission?
- Lagarde’s answer: euro area architecture reform is not finished; fiscal measures are taken at the national level. She expresses hope that the Juncker plan will demonstrate willingness to have a larger common budget beyond limited investment budgets.
Transcript dated April 12, 2017. IMF Communications Department; MEDIA RELATIONS; PRESS OFFICER: Andreas Adriano. Phone: +1 202 623-7100Email: MEDIA@IMF.org