## "Global Risks Are Rising, But There Is a Path to Recovery": Remarks at Jackson Hole, By Christine Lagarde, Managing Director, International Monetary Fund

_IMF News, August 27, 2011_

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## Bibliographic details
- Authors: Christine Lagarde
- Published: August 27, 2011

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### Context and framing
- Event: Jackson Hole conference; speaker: Christine Lagarde, Managing Director, International Monetary Fund.
- Date: August 27, 2011.
- Core framing:
  - Global economy continues to grow, yet not enough.
  - Some causes of the 2008 crisis have been addressed, yet not adequately.
  - There remains a path to recovery, yet time is limited.
- Two-year retrospective: "Two years ago, it became clear that resolving the crisis would require two key rebalancing acts—a domestic demand switch from the public to the private sector, and a global demand switch from external deficit to external surplus counties."

### Major findings and risks
- Balance-sheet linkages: Weak growth and weak balance sheets of governments, financial institutions, and households are feeding negatively on each other.
- Deterioration in confidence: Policymaker hesitation has aggravated risks and increased the likelihood the fragile recovery could be derailed.
- New dangerous phase: Recent developments (summer 2011) indicate increased downside risks and urgency for action.
- Rebalancing insufficient: Progress on both domestic and global rebalancing has been "timid at best."
- Global interdependence: "Decoupling is a myth"—advanced country recession would affect emerging markets; low-income countries remain vulnerable.

### The balance sheet problem (diagnosis)
- Root cause: Too much debt and leverage in key advanced economies; financial practices magnified, disguised, and fragmented risk; households over-borrowed.
- Long adjustment: Housing and financial crises take a long time to work off and require decisive action.
- Current headline problems: sovereigns in most advanced economies, banks in Europe, and households in the United States.
- Policy instruments at risk: Continued growth loss would worsen balance sheet problems, threaten fiscal sustainability, and reduce policy effectiveness.

### Policy agenda (general prescriptions)
- Fiscal policy:
  - Fiscal consolidation remains an imperative.
  - Macroeconomic policies must support growth; countries must navigate between losing credibility and undercutting recovery.
  - Each country needs a dual focus: durable measures that deliver savings tomorrow to create space to support growth today (examples: measures that change the rate of growth of entitlements, health or retirement).
- Monetary policy:
  - Should remain highly accommodative because "the risk of recession outweighs the risk of inflation."
  - Rationale: (i) in most advanced economies inflation expectations are well anchored; and (ii) pressures from energy and food prices are abating.
  - Policymakers should be ready to return to unconventional tools as needed.
- Micro-level measures:
  - Relieve balance sheet pressures for households, banks, and governments.
  - Address root problems to avoid a painful, drawn-out adjustment.
  - Structural reforms to boost productivity and growth over time, while taking care not to weaken short-term demand.
- Coordination:
  - A new approach is required—bold political action with a comprehensive plan across all policy levers, implemented in a coordinated global way.

### Europe — diagnosis and three key steps
- Diagnosis: Urgent need to remove uncertainty around banks and sovereigns; financial exposures are transmitting weakness and spreading fear across markets and countries.
- Three key steps Europe should take:
  - First: Ensure sovereign finances are sustainable.
    - More fiscal action and more financing.
    - Not necessarily drastic upfront belt-tightening if long-term fiscal risks (rising pension costs or healthcare spending) are addressed to create short-run space for growth and jobs.
    - Sufficient financing can come from private or official sector—including continued support from the ECB, with full backup of the euro area members.
  - Second: Urgent recapitalization of banks.
    - Banks must be strong enough to withstand sovereign risks and weak growth.
    - Most efficient solution: mandatory substantial recapitalization—seek private resources first, but use public funds if necessary.
    - Option: mobilize EFSF or other European-wide funding to recapitalize banks directly to avoid additional burdens on vulnerable sovereigns.
  - Third: Adopt a common vision for the eurozone’s future.
    - Recommit credibly to a common vision built on solid foundations, including fiscal rules that actually work.
    - Avoid ambivalence or unclear messaging that magnifies uncertainty.

### United States — specific priorities
- Key tensions: Need to balance reducing public debt and sustaining the recovery, with special emphasis on making a serious dent in long-term unemployment.
- Two specific fronts:
  - First: Nexus of fiscal consolidation and growth.
    - Credible decisions on future consolidation (revenues and expenditures) create space for growth and jobs today.
    - Growth is necessary for fiscal credibility.
  - Second: Halt the downward spiral of foreclosures, falling house prices, and deteriorating household spending.
    - Possible measures: more aggressive principal reduction programs for homeowners, stronger intervention by government housing finance agencies, or steps to help homeowners take advantage of low interest rates.

### Global dimension and low-income countries
- Emerging markets:
  - Some key emerging economies keep domestic demand growth too slow and block currency appreciation, which is not in their or the global interest.
  - Other emerging markets that allowed appreciations face threats from capital inflows.
- Low-income countries:
  - Need to protect themselves from external shocks by rebuilding policy buffers and investing in social safety nets.
  - International community must stand ready to help.

### Conclusion and call to action
- Summary judgment: "Risks to the global economy are rising, but there remains a path to recovery."
- Imperatives:
  - Act now, act boldly, and act together.
  - Coordinated action by all countries will have far greater effect than isolated actions.
- IMF commitment: The IMF will continue to advocate for these outcomes and lend material support where requested and relevant. 

*Remarks prepared for delivery, Jackson Hole, August 27, 2011 — Christine Lagarde, Managing Director, International Monetary Fund*

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## References

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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp082711_