Cooperation and Connectedness-an Address to the Associated Press By Christine Lagarde, Managing Director, International Monetary Fund
IMF News, April 3, 2012
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- Authors: Christine Lagarde
- Published: April 3, 2012
Global economy — current assessment and priorities
- Recovery is "still very fragile" with "financial system in Europe ... still under heavy strain" and "Debt is still too high, public and private."
- Key near-term risks: stubbornly high unemployment and rising oil prices.
- Three broad policy dimensions to keep recovery on course:
- Stability
- Welcome European decision to "strengthen their firewall" to help stop contagion.
- Need to increase the IMF’s resources to support a "stronger global firewall."
- Call for stronger, safer financial sector with coordinated regulation, effective implementation of Basel III, and more agreement on regulation of derivatives, the shadow banking system, and effective resolution of cross-border banks.
- Growth
- Short-run focus: support demand; use monetary policy to support activity given "no real signs of inflation among the advanced economies."
- Use fiscal policy to support activity "wherever possible"; avoid a "global undifferentiated rush to austerity."
- Specific U.S. fiscal reality: "total U.S public debt already exceeds 100 percent of GDP."
- Need to curb entitlement spending growth and raise more revenue over time.
- Household debt constraints in the United States: "about 1.5 million mortgages are seriously delinquent."
- Policy suggestions: encourage mortgage writedowns, ease refinancing, and aggressively implement administration proposals to avoid foreclosures, improve household finances, and boost consumption.
- Principle: "Banks were helped so they could lend more; homeowners should be helped so they can spend more."
- Jobs
- Global unemployment and inclusiveness:
- "Over 200 million people across the world today can’t find work."
- "Nearly 13 million people right here in the United States" are unemployed.
- Priority: make growth more inclusive and address youth unemployment.
A world of interconnections — evidence and implications
- Long-term changes in global integration:
- "Since 1980, the volume of world trade has increased fivefold."
- "By the time of the crisis, global capital flows were more than triple the level of 1995."
- Trade and production linkages:
- Example: modern car production requires "up to 40,000 different parts" — single-part disruption can halt supply chains.
- U.S. share of global trade: "11 percent of global trade."
- U.S.–Europe linkages:
- "About a fifth of U.S. exports go to Europe."
- "Two-thirds of EU trade is internal to the union, exports to the United States account for almost a fifth of the remainder."
- Pre-crisis corporate ties: "U.S. S&P500 companies were earning 20 percent of their profits in Europe."
- "Five of the top ten overseas markets for U.S. investment are in Europe."
- "European-owned companies in the United States employ about 3.5 million people."
- Financial interconnectedness:
- Foreign banks hold "about $5½ trillion of U.S. assets."
- American banks have "$2½ trillion of foreign assets."
- Implication: banking problems transmit rapidly across borders with large, immediate effects.
Cooperation and the IMF — role, resources, and governance
- Role of the IMF:
- Described as "an economic club and a giant credit union" with 187 member countries and a single mandate: "global financial stability."
- Functions: pool resources, provide lifelines to members, and help members adjust with minimal disruption.
- Historical engagement:
- IMF involvement cited across multiple episodes: postwar Europe, newly independent African and Asian countries, Latin American debt crises in the 1980s, post–Berlin Wall transitions, and the response to the global crisis three years prior.
- Resources and reform:
- Current funding gap concern: "The ratio of Fund quotas to world GDP is significantly lower today than in the past."
- Historical reference: "Sixty years ago, it was as much as 3-4 times higher."
- Urgent call: increase IMF "firepower" now that Europeans have acted on their firewall.
- Governance reforms: members approved quota-share increases for dynamic emerging markets (Brazil, Russia, India, China); implementation urged "by the time of our Annual Meetings later this year."
- Assurance on U.S. role: "Even with these reforms, the United States will retain its leadership role as our largest shareholder."
- Value proposition to contributors:
- "Your money is not drawn upon until needed. Your money earns interest. Your money is used prudently—our programs always carry rigorous conditions."
- Claim: "No member country has ever lost money by contributing to IMF resources—and I assure you that will not change on my watch."
Conclusion — three closing thoughts
- First: "Cooperation can deliver." Historical record shows accomplishments when the global community pulls together and the United States leads.
- Second: In a world of dense interconnections, cooperation is urgent; citing John F. Kennedy: "Geography has made us neighbors, history has made us friends, economics has made us partners, and necessity has made us allies."
- Third: The IMF exists to serve members, including the United States: "Support us. Use us. Work with us."
Source: "Cooperation and Connectedness-an Address to the Associated Press By Christine Lagarde, Managing Director, International Monetary Fund", April 3, 2012.