## Promises to Keep: The Policy Actions Needed to Secure Global Recovery

_IMF News, September 24, 2012_

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## Bibliographic details
- Authors: Christine Lagarde
- Published: September 24, 2012

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### Introduction & Global Outlook
- Speech by Christine Lagarde, Managing Director, International Monetary Fund, at the Peterson Institute for International Economics, Washington DC, September 24, 2012.
- Main message: the urgent need to implement the policy actions required to secure the global recovery; “we have promises to keep.”
- Recent central bank initiatives cited as positive policy signals: the European Central Bank’s OMT bond-purchasing program, QE3 by the U.S. Federal Reserve, the Bank of Japan’s expanded Asset Purchase Program.
- IMF view on current global trajectory:
  - Project a gradual recovery, but global growth will likely be a bit weaker than anticipated in July; forecast has trended downward over the last twelve months.
  - Central problem: uncertainty about whether policymakers can and will deliver on their promises.
  - Real effects of uncertainty: increasing divergence in the Eurozone; a tepid recovery in the United States; slowdown in emerging markets; concern in low-income countries about rising food prices and volatile commodity prices; growing frustrations across the Middle East.
- Lasting legacies of the crisis highlighted:
  - Lasting scars of unemployment, especially among young people and in countries like Greece and Spain.
  - Lasting burden of high public debt—“now at levels rarely seen since the Second World War.”
  - Lasting costs of a poorly functioning financial sector; “Despite real progress, not yet” safer.

### A. Challenges Facing Europe and the US
- Europe: identified as the epicenter where the most urgent action is needed.
  - Need for a strong and effective banking union to break the vicious cycle between banks and sovereigns.
  - Euro area leaders must deliver on June 29 commitments—establishing a single supervisory mechanism and enabling the direct recapitalization of banks.
  - Other consistent calls: implement the European firewall (notably the European Stability Mechanism); implement the agreed plan for fiscal union; implement country-level programs for growth, jobs and competitiveness.
  - IMF position on program design and support:
    - Favorable consideration for timely and flexible support: slowing the pace of fiscal adjustment where needed; focusing on measures rather than targets; emphasizing growth alongside fiscal consolidation.
- United States: a major risk with immediate fiscal concerns.
  - Current law implies a dramatic tightening of the deficit by about 4 per cent of GDP next year—risk of plunging the country off a “fiscal cliff.”
  - Such tightening could reduce growth by as much as 2 percent.
  - Failure to reach a deal on raising the debt ceiling could also force a dramatic tightening.
  - IMF call: political clarity and action to avoid the fiscal cliff and a concrete plan to bring down debt gradually over the medium-term.
- Overarching recommendation: coordinated implementation across multiple players—“multiple players playing one game.”

### B. Challenges Facing the Rest of the World
- Emerging markets:
  - The illusion of “decoupling” has vanished; major emerging markets are slowing.
  - Policy advice: position themselves as future global growth leaders by countering vulnerabilities (domestic or external); in some cases pause monetary and fiscal tightening or provide additional stimulus (example: China); ensure high credit growth does not compromise financial stability.
  - Prepare for potential spillovers from other parts of the world.
  - IMF instruments available: Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL); examples of users: Colombia, Mexico, Morocco, and Poland.
- Low-income countries:
  - Performed relatively well through the crisis but are more exposed to shifts in economic fortune and to slowdowns in emerging markets.
  - Food price concerns:
    - 20 percent increase in global food prices since June.
    - Prices of maize and wheat increased by 25 percent in July alone.
    - Countries reliant on imports of these grains, such as Lesotho (also hit by drought), are especially vulnerable.
  - IMF advocacy: continued quality policies and increased international support, including ensuring sufficient financing for the IMF’s concessional lending via the Poverty Reduction and Growth Trust (PRGT).
- Middle East transitions:
  - Transitioning through regime change is historic and difficult; requires time to formulate strategies, build consensus, and begin inclusive growth and employment.
  - External support needed: financial assistance, FDI, market access, and technical assistance.
  - Concern that many members of the Deauville Partnership have yet to deliver at anticipated scale.
  - IMF commitment: advice, technical assistance, and financing—“We have already committed more than $8 billion to three countries.”

### C. Challenges Facing the IMF
- Need for the Fund to adapt to better serve changing global membership; three priority areas highlighted:
  1. Strengthening surveillance to focus on global stability:
     - Upgrades include:
       - a new Decision for deeper analysis of spillovers and cross-border effects;
       - a new External Sector Report to sharpen assessment of countries’ policies from a multilateral perspective, including exchange rates;
       - much greater focus on analysis of the financial sector.
  2. Strengthening the global financial safety net and the Fund’s firepower:
     - Recent support: 37 countries making an exceptional contribution of 456 billion dollars in support of the IMF.
     - Ongoing effort to augment resources to support low-income countries via the PRGT.
  3. Strengthening governance to reflect changing membership:
     - 2010 reforms represent the most significant governance changes in IMF history:
       - increasing the quota shares of dynamic emerging and developing countries by a further 6 percent, totaling 9 percent since 2006;
       - ensuring all the BRIC countries will be in the top ten Fund shareholders;
       - creating—for the first time—an all-elected Executive Board.
     - Reform status and targets:
       - Exceeded the 70 percent of consents required for the quota increase.
       - Very close to reaching the 113 countries required to approve the Board reform—hope to achieve that goal by Tokyo.
       - Pushing to get the 85 percent of voting power needed for the Board reform.
     - IMF aim: reach final agreement on the whole reform package by the time of the Annual Meetings in Tokyo or as soon as possible thereafter.

### Policy Imperatives & Collective Promise
- Immediate policy imperatives:
  - Deliver on commitments at domestic, regional, and multilateral levels to reduce uncertainty and lock in a sustained rebound rather than a temporary bounce.
  - For Europe: implement banking union, firewall measures, fiscal union commitments, and tailored country programs with growth orientation.
  - For the United States: avoid fiscal cliff and reach medium-term debt reduction plan.
  - For emerging markets: manage vulnerabilities, calibrate stimulus or tightening appropriately, safeguard financial stability.
  - For low-income countries: protect against food price shocks, ensure continued quality policies, and secure sufficient concessional financing.
  - For the Middle East: provide coordinated external support—financial, FDI, market access, technical assistance—to enable successful transitions.
  - For the IMF: complete governance reforms, enhance surveillance and spillover analysis, and maintain adequate resources—particularly for the PRGT.
- Collective promise: strengthen international cooperation, place broad global interest above narrow national interest, and restore certainty and confidence to support a global recovery.

*International Monetary Fund — Promises to Keep: The Policy Actions Needed to Secure Global Recovery, Christine Lagarde, September 24, 2012.*

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## References

- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Spain and the IMF](http://www.imf.org/external/country/ESP/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Christine Lagarde](https://www.imf.org/external/np/omd/bios/cl.htm)
- [Press Release: IMF Managing Director Christine Lagarde Calls for Action Now to Secure Global Recovery](https://www.imf.org/external/np/sec/pr/2012/pr12358.htm)
- [https://www.imf.org/external/am/2012/index.htm](https://www.imf.org/external/am/2012/index.htm)
- [Webcast](https://www.imf.org/external/mmedia/view.aspx?vid=1858912154001)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp092412_