Transcript of an Interview with IMF Managing Director Christine Lagarde with the Leading European Newspapers Association

April 12, 2017

IMF Managing Director Christine Lagarde gave an interview on April 12, 2017 in Brussels to Jean-Jacques Mével (Le Figaro), Claudi Pérez (El País) and Dominique Berns (Le Soir), representing the Leading European Newspapers Association (LENA), which also includes La Repubblica (Italy); Tribune de Genève and Tages-Anzeiger (Switzerland); and Die Welt (Germany).

QUESTION - Growth is picking up, including in Europe, but political uncertainties, including what you call the “protectionist sword”. On two countries, specifically: first, France: what is at stake in the coming elections? Is it a choice between protectionism and openness? And second, on the US: The Trump administration is in place for more than two month, is he really going into his protectionist agenda?

MS. LAGARDE - As head of the IMF, I am precluded from saying very much on France because I am a French national. But clearly there is rising concern about the uncertain outcome of the elections. There is no single country that I have visited in the last couple of months where I have not been asked with anxiety what the outcome might be. It matters because of the role played by France, the size of the French economy relative to other euro area partners, and because some of the ideas being discussed seem aimed at disrupting the current architecture of the European Union as far as France is concerned. 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.

On the US, there is already a great discrepancy between the pre-election rhetoric and the actual steps that have been taken in the last few weeks. My view is to focus on the actual measures, the policy determination, the laws that are implemented--rather than speculate on the possible interpretation of this or that.

What I have seen at the G20, in discussions with my counterpart, the Secretary of the US Treasury, is the willingness to work together, to take sensible, not extreme views on countries we are trying to help. I am comforted by the willingness to cooperate. We have to continue to demonstrate the benefits of cooperation. I will take advantage of the IMF/WB spring meetings next week to facilitate the discussion about what is good for stability, for prosperity, and how we can foster improved productivity for all. I am reasonably optimistic we can clarify some of the confusion and misunderstanding.

When people hear "fair trade," they instantly say “Oh, risk of protectionism!” When I hear free, fair and global trade, however, I say, “OK this is a good proposition.” So, what we put behind the concept of “fair” is what needs to be discussed and defined with everybody around the table--and this is what we will be doing at the spring meeting.

QUESTION - You mentioned the need to reduce excessive external imbalances and we understand Germany, of course. Do you think Germany should do more and invest more in infrastructure, for themselves and for Europe?

MS. LAGARDE - The simple answer is Yes. Countries that have excessive imbalances should look at ways to reduce them, taking into account the particularities of their own economy. Germany, with its aging population, should have, and can legitimately aim to have, a degree of surplus, but not to the extent we see at the moment: 4% would perhaps be justified, but 8 % is not. The good news is that Germany has already begun investing--including the funding of refugees; it has also begun investing in infrastructure. But it is a slow process and our recommendation is for still more of these investments, for example, in more broadband. It should also be noted that Germany is one of the few countries to financially commit 0.7 percent of GDP to global development.

QUESTION - Is Trump right to criticize the German trade surplus? Are the bad guys saying the right things?

MS. LAGARDE - I would stay away of the “bad guy” language--that is a moral judgement that does not have a place in the kind of work we do. When there are excessive imbalances, when there is excessive inequality, or instability in the financial system, all those three are bad for stability, for the sustainability of growth. We do not shy away from saying that.

QUESTION - The world economy struggles to leave what you have christened as the New Mediocre. Has Trump and his stimulus package changed anything?

MS. LAGARDE - As economists say, expectations matter a lot. And clearly, as a result of an expected US fiscal stimulus and an expected tax reform, there has been optimism, some unleashing of 'animal spirits.' Expectations of improved growth are clearly visible in the market valuations. Asset prices are at their highest in the last 8 years or so. This is all anticipation. It remains to be seen how much of it will be actually implemented, when it will be implemented, how it will spill over to the real economy, and what it will precipitate. But if we see, as a result of this wave of optimism, investment from the private sector, a pickup of more financing of R&D in the private sector, that will be good for the real economy.

QUESTION - You just made clear the IMF didn’t make any final decision on Greece. But did you make any progress in reconciling the two views, the European and IMF, regarding the long term fiscal surplus?

MS. LAGARDE - There are two aspects to it. One is short term, which is part of the ESM program and would be part of our own program-- if we were to have one. And second, there is the longer-term fiscal path going forward, which will determine the debt sustainability analysis. In both areas, we need to converge as much as possible. But clearly, whatever the IMF would finance--if we were to join--would be on the basis of both the fiscal path and our 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 the Europeans determine differently, then we need to take that into account. But we cannot adopt unreasonable forecasts or build unjustifiable macroeconomic frameworks.

QUESTION - Is it conceivable that the IMF would not take part in the program? There are also grumbles on Capitol hill about the IMF lending too much money to Greece for too long. Do you have to balance these two dimensions?

MS. LAGARDE - It is plausible that the IMF would participate in a Greek program, as the Greek government has requested, if significant reforms are legislated to be implemented, and if debt is restructured to accommodate our debt sustainability analysis--conducted in accordance with the IMF’s rules. So, it is plausible. And we have seen progress on the first part.

The volume of our possible financial commitment is not going to be necessarily the most important contribution that we make--because the European Stability Mechanism is very well financed. It is more our discipline, our integrity, and our expertise generated over so many years that is actually a greater value to Europeans.

QUESTION - Without a debt restructure upfront, the IMF will not participate?

MS. LAGARDE - If the Greek debt is not sustainable in accordance with the IMF’s rules and on the basis of reasonable parameters, we will not participate in the program.

QUESTION - Is the staff of the IMF now convinced that the debt is not sustainable as it is?

MS. LAGARDE - Based on the debt sustainability analysis, we will determine how much debt needs to be restructured. But there is no question in our mind that a degree of debt restructuring is needed.

QUESTION - Why is the IMF taking even more time than the Eurogroup to decide on Greece?

MS. LAGARDE - Because we want 'two legs' for the program. We need solid reforms, and we are getting there: the team is going to be back in Greece to negotiate, fine-tune, put things on paper, so as to be a binding agreement between all the parties. So, we need solid reforms--and we need debt that is sustainable. And for that, restructuring will be needed. We do not have that yet, and the discussion on that needs to be completed.

QUESTION - Spain is doing better, but the fundamentals remain very much the same in terms of unemployment, young unemployment, high labor market duality, high public, private and external debt. What should Spain do to have enough policy buffers for the next crisis? Is a labor reform necessary after three of them in the last six years?

MS. LAGARDE - I would preface any comment by paying a strong tribute to the Spanish people and the Spanish resilience to actually implement serious, solid reforms. It is not a miracle that the numbers have improved, that the economy is turning the corner, and that unemployment, as high as it was, has now gone down – and I hope this continues. In particular, we believe that the duality of the labor market (short-term more exposed employees on the one hand, and more protected, longer-term unlimited contracts on the other hand) is not conducive to resolving the unemployment situation in Spain. So, that duality needs to be addressed.

One of the keys of the Spanish recovery has been the determination to implement reforms. For example, the determination to address banking sector instability and non-performing loans. All of that was done with cooperation around the table. The ESM was there with financing. The European Commission and the IMF were there to monitor and help. The combination has been really good.

QUESTION - Can we talk about a success story in Spain with 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?

MS. LAGARDE - The mission is not yet accomplished, but real efforts and good progress have been made. My grand-mother used to say: 'everything is better with butter.' I will say: everything is better with growth. And 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. Hopefully this will translate into more employment and higher incomes, and reform of the labor market.

QUESTION - You say the UK is still having growth, being still in the EU. Do you think that Brexit can be a bad trip for the UK?

MS. LAGARDE - As you know, we had anticipated a much lower growth than the UK has demonstrated during the last quarters. But we are beginning to see – in terms of disposable incomes, of depreciation of the currency, etc. – the beginning of the impact of Brexit. And the more discussion there is of companies or financial institutions relocating to Frankfurt, Dublin or Paris, the more uncertainty there will be in a country where the capital city plays such a role as a financial center.

QUESTION - Would the Eurozone, as it is now, be able to withstand a new financial/banking crisis? Or should some more reforms be made? And, in that case, which reforms are more needed/urgent?

MS. LAGARDE - The Eurozone is certainly much better equipped than it was in 2008: it now has a European Stability Mechanism (ESM), it has reinforced its supervision framework, and better common regulation of the banking sector, and so on. But unless it has a clear, efficient and respected Stability and Growth Pact – more so than it is today; unless it has a common joint fiscal policy; unless it one day has the ability to raise and manage debt on a euro basis; unless it has – as Jean-Claude Trichet advocated five years ago, when he left as the head of the European Central Bank (ECB) – a single Finance minister; and unless it has completed the banking union; then it would be mission not accomplished.

QUESTION - What do you mean by: “to raise and manage debt on a euro basis”?

MS. LAGARDE - Well, let me be clear that I am not speaking about Eurobonds, because that is a hot topic. I will leave it to President Juncker and the European heads of state and government to decide how they want to manage that. There are multiple proposals on the table. I have heard many of my former colleagues say that once a level of convergence is reached, once a common discipline can be enforced, that could be the next move.

QUESTION - Is the fate of the euro also at stake in the French presidential elections?

MS. LAGARDE - It is clearly one of the debates. And one that actually weighs on the confidence and the stability of the euro area--because if one of the largest partners is wondering if its destiny and fate is in or out of the group, it is a huge question mark for the others.

QUESTION - If there is no unpleasant surprise with the French and German elections, do you except a move towards more integration in the Eurozone?

MS. LAGARDE - Why not? It would certainly be consistent with the initial proposal of the monetary union. The trick is to facilitate monetary and fiscal union while respecting national cultures, national traditions, and national roots. How do you keep your feet deep in the ground? How do you protect and preserve your roots while embracing and stretching out to a larger community?

I remember negotiating as trade minister: if you are a relatively small player negotiating with very large economies, you are not very strong. If you bring those players together to form a unit which is on par with the likes of the US and China, then you can talk.

QUESTION - Jeroen Dijsselbloem, the president of the Eurogroup, infuriated the Spanish, Italian, Portuguese people, saying: “You cannot spend all the money on drinks and women and then ask for help.” What do you think of those words?

MS. LAGARDE - I do not like them. I do not know the context, but I do not like them.

QUESTION - One last question about the Eurozone: why aren’t we able to agree on a global fiscal impulse of 0,5% of GDP in 2017 as the IMF and the European Commission have recommended?

MS. LAGARDE - Because the job (the reform of the euro area architecture) is not finished. So, all those fiscal measures are taken at the national level. But I hope that the Juncker plan, at the European level, will demonstrate that there can be a willingness to have a budget together. Not just a limited investment budget, but a much larger budget.

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