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Speech of Mr. Dominique Strauss-Kahn
Minister for the Economy, Finance and Industry
The last forecasts established by the IMF confirm the dynamism of world growth. This favorable situation does not dispense us from reflecting upon the mechanisms now in place and on the ways to improve them. It is as much within the IMF's purview as it is each Government's.
Today, faced with a new kind of growth, we must develop new regulations, for a more just and effective world. To do so, we must identify the ways to achieve long-term, balanced growth and to define rules which will enhance this dynamic movement. The international financial community has a considerable responsibility in this regard. It is in this spirit that we offer the following proposals:
1. Mobilization for long-term, balanced growth
I fully share the assessment of my Finnish colleague, Chairman of ECOFIN Council, on prospects for the European Union and the Euro zone: conditions for strong and lasting growth are largely present. Exports are on the upswing, prospects for industry have been improving for the last few months, household confidence is strong and their purchasing power well-directed. Under these conditions, growth should be sustained throughout the second half on the yar and into 2000.
France is a key motor in the health of the European economy. Growth has resurged in the second quarter and the "air pocket" we hit last winter is definitively behind us. And this growth characterized by strong job creation. Since June 1997, more than a million jobs have been created in the private sector. This is due, in large part, to well balanced macro-economic policies, link to an improved fiscal situation, and appropriate monetary policy, as well as reform to encourage innovation, reducing charges on low salaries and finally, reduction and better management of working hours. Also, in spite of the slowdown at the beginning of the year, the unemployment rate is steadily diminishing. The evident upward trend in investment is fast eradicating the lag left-over from the early 90's conferring the French economy with strong and lasting growth.
All in all, growth could increase from + 2.3% this year to a bit under + 3% next year.
The good outlook for Europe is in contrast with the uncertainties still weighin on Japan, despite recent more favorable indicators. Self-sustained growth has not yet taken off. Internal demand is fragile, because of the increase in unemployment and a downward revenue trend. External demand can thus play an important role on the condition that the value of the yen ceases to rise.
Strong American growth remains impressive. The solf landing sought by US authorities shouldn't mask the performance of the last years. In this regard, I welcome the fact that budget policy is contributing to reducing the savings deficit: lowering taxes would only increase existing imbalances.
The emerging and developing economies are gradually recovering, after having traversed a very difficult and uncertain period as a result of the financial crises and of the 1998 decline in commodities prices. But improvement remains uneven. The positive signs which have appeared in the last several months, especially in Asia, must not become pretexts to forget either the continuing vulnerability of these economies to external shocks, nor the extent of the structural reforms still to be undertaken. Concerning Indonesia, in particular, it is clear the economic stabilization is inextricably linked to political reform and to improvement in good governance.
In most Latin American countries, courageous adjustments have been undertaken ; Brazil is recovering faster than forecast. But, activity in the region has remained lethargic, even losing some ground.
A year ago, our meeting opened in an atmosphere of anxiety : the Asian crisis, the Russian default, capital reflows in the emerging countries, a listless Japanese economy, ailing markets in developing countries, all this suggested the threat of a general recession. The wise economic policy followed in Europe and the United States, the determined action of Bretton Woods institutions, the courage of the governments and people affected by the crisis in the emerging world, made it possible to avoid the worst, current prospects for world growth are such as to inspire new optimism. We must now consolidate these initial results.
2. For a new kind of growth we need new regulation in support of good governance and against money laundering.
To be up to the challenge of globalization, we must have new regulations: in international commerce, fair competition is crucial to efficient international competition. For the last two years, encouraged notably by France, initiatives have been launched, largely within the framework of the Forum of Financial Stability, chaired by A. Crockett. These should rapidly result in concrete reforms. If not, this scourge, which represents between 2% and 5% of global GDP will continue to grow. It is in this spirit that France makes the following propositions in favor of:
b) The next step: a better international financial architecture.
The proposed resolution aimed at perpetuating our Committee is an important step towards reinforcing the governance of the Fund and improving its functioning. The institution needs a greater involvement of member governments in the design of its policies. The more legitimate its actions are considered to be, the more effective they will be. We have reached very positive phase today, but it is still only a phase. To my mind, the arguments for a "Council" of the IMF remain valid, and I am convinced that a more ambitious reform is both necessary and inevitable.
The reform of the international monetary and financial system which we launched over a year ago has made real progress. Working out the different codes, strengthening the IMF's surveillance mechanism for assessing potential economic vulnerability, and the redefinition of a realistic strategy for openness to capital flows are all essential building blocks.
Exchange rate systems and policies have played an essential role in the recent crises. In conformity with its mission, the IMF must develop a global strategy. But, it must guard against a position, which, although failing to be convincing, would be simplistic. This would consist of encouraging exchange rate policies at the two extremes -pure floating rates, or a Currency Board-and to consider all other regimes untenable.
Such a vision would negate regional dynamism. If it had been chosen,, the euro would not today be the European currency. We have to leave room to pursue this sort of cooperation. This is why, instead of posing a false alternative between two extreme regimes, we must apply consistent and transparent principles: in opting for an exchange rate regime, a country should specify the objectives it is pursuing and its goals for its exchange rate policy. The IMF must participate in view of the policy options by the country.
In regulating financial activities, hedge funds must not be left out.
Traditionally limited to protecting savings, it is now recognized that prudential regulation impacts the macro-economy. The creation of the Financial Stability Forum, which unites the Bretton Woods institutions and the financial oversight organizations, illustrates this point.
I very much desire that traditional reluctance gives way to the will to act in the context of this institution's work. For example, it is obvious to all that a large commercial bank whose potential difficulties could have a systemic impact on markets, must be subject to prudential regulation to limit its leverage, its liquidity risks, and its exposure concentration. I must confess that I cannot understand why it does not seem equally obvious to subject an investment bank or a hedge fund to similar regulation. These institutions can harbor exactly the same systemic risks, even to the point of provoking central bank intervention as recent experience demonstrates. For this reason, above and beyond making the necessary progress on transparency and oversight "via les positions des établissements financiers" it seems indispensable to development regulations directly applicable to these funds.
Finally, the private sector must be involved in resolving crises.
The principle of private sector involvement in crisis management is not taken as a matter of course. But from recent examples of negotiation with the private sector have demonstrated the limits of a strictly cooperative approach. We must be prepared to make public an agreed basis for private sector involvement.
I would like the IMF, along with other interested institutions, to work as quickly as possible on the basis of the principles proposed by the G7 at the Cologne Summit and with the intent to achieve equitable treatment for all private creditors.
France naturally shares everyone's concern that the IMF not be involved in negotiations which basically deal with the bilateral relations between debtor countries and private creditors. But, I am just as concerned that debtor countries not be left alone to decide which category of private investors should bear the brunt of the debt owed. Opening an avenue to selective default seems to me to be just as dangerous for international financial stability as is freeing the private sector from its obligations through public financing contributions.
With the Paris Club principle of comparability of treatment, we have at our disposal a preliminary response. In cases where this principle is at stake, determining how analysis applicable to both debtor countries and private investors. I would ask that in other cases, the international community be sure that all categories of creditors be involved equitably, no matter what the nature of the debts at stake.
We must also be ready, in situations where the cooperative approach upon which we have based our procedures reaches its limits, we have recourse to more forceful solutions-clearly demonstrating our determination to achieve real burden-sharing among lenders. The IMF arrears policy is but one of the mechanisms at our disposal.
The last block of reform on which I would like to pause is financial regulation. The scope of activity of financial institutions has become much more complex and the boundaries blurred. The greatest stake in prudential regulation is certainly still protecting savers, but clearly such regulation must now extend to the "macro-financial" (even macro-economic !) impacts of the behavior of financial institutions. In a certain way, the creation of the "Forum of Financial Stability" which combines the Bretton Woods organizations and currency control organizations acknowledges this. But, attitudes have not yet completely evolved. For example, it is obvious to all that a large commercial bank, whose potential difficulties could have a systemic impact on markets, must be subject to prudential regulation to limit its leverage, its liquidity risks, and its exposure concentration. I must confess that I cannot understand why it does not seem equally obvious to subject an investment bank or a hedge fund to similar regulation. These institutions can harbor exactly the same systemic risks, even to the point of provoking central bank intervention as recent experience demonstrates. I persist in my conviction that we must pursue our reflection along these lines.