Christine Lagarde speaks on lessons from crisis
When you are a eurozone finance minister, you have more of a national or a European view. You are more concerned with what is happening within your jurisdiction and less so with what is going on outside.
Lagarde, you were Minister in Paris and now you are at the helm of the International Monetary Fund (IMF) in Washington. Has your view on the world changed as a result?
It has definitely changed my view. As French Finance Minister I had probably a narrower view of the European crisis. Moving here naturally expanded my horizon.
I think I became more aware of the consequences that the euro crisis had for other parts of the world. I became more attentive to and sensitive about the expectations and concerns and also impatience in many countries outside Europe. When you are a eurozone finance minister, you have more of a national or a European view. You are more concerned with what is happening within your jurisdiction and less so with what is going on outside.
What causes this impatience?
If you experience the effects of an event that you cannot do anything about, then you are bound to be impatient—and you want desperately that something gets done.
But when the Europeans have to pay the bill, it is easy to make demands.
I would not say so. By allowing the IMF to become engaged, the international community is contributing to the financial support needed to overcome the crisis.
Why is it then?
The Europeans are not good at explaining the decision-making process. We use too many acronyms and too much technical language which is difficult to understand outside Europe. This creates the false impression that nothing is progressing. And I do not exclude myself here, I was no better. But since then, I have advocated with my colleagues in Europe to better explain and communicate the process and circumstances.
But it is also about substance. The Europeans are often accused of setting the wrong priorities. Do you think this criticism is justified?
I was always convinced that in principle the European approach of pursuing the right mix of sound policies is appropriate: sustainable fiscal policy, stability-oriented monetary policy, and improving competitiveness. I supported these principles as Finance Minister and I continue to support them today.
Really? The IMF again and again warned against a consolidation course that is too ambitious—much to the detriment of the German government.
We are still of the view that fiscal consolidation is a necessity. Where you notice a slight evolution in our approach is that we are emphasizing more that it should not happen at the same pace everywhere and it should be country-specific.
What does that entail?
It means, for example, that countries should have structural…
…in other words, economically adjusted…
…rather than nominal targets to prevent governments responding to growing budget deficits—that are caused by worsening economic circumstances—with cuts that dampen growth further. At the same time, monetary policies should remain accommodative to support the economic recovery. And trade imbalances have to be reduced—in other words, trade deficits have to be reduced in the South and domestic demand has to be strengthened in the North.
Still, for the crisis countries in southern Europe tough austerity conditions were prescribed. How does that work?
These countries were under enormous pressure from financial markets. They had to prove that they are addressing their problems. But there are other countries that don’t have any problems in tapping financial markets for fresh money.
You mean Germany?
Germany, for example, but I can also think of a few other candidates. They can afford to pursue a slower consolidation course than others. This helps to counteract the growth-dampening effects that emanate from the cuts in the crisis countries.
Saving slows down the economy. Is that one lesson from the crisis?
We have a better understanding now than before how fiscal restraint affects growth. Our experts have provided important research findings on that issue.
The IMF once had the reputation of not paying much attention to this. Your people prescribed drastic austerity measures around the world, even if that stalled the economy. Are you smarter today?
I have not been here for very long, but I think there has been an evolution in thinking. There was a time when programs were very focused on frontloading, and maybe did not give as much thought to the potential consequences of overly rapid deficit reductions—and how this may affect those who depend on public support. Today we try to preserve social safety nets as much as possible and find the right balance for expenditure cuts to protect the most exposed and poor, while at the same time helping to reinvigorate economic growth.
Does that mean that in hindsight, the first rescue program for Greece was a failure? The country is stuck in a severe recession and social tensions are rising.
I don’t see it that way. The loss of confidence among investors and also the European partners was enormous. The Greeks had to demonstrate that they were capable of addressing the problems. And they are. Look at the fiscal position, a lot has happened on that front.
As a European, how do you explain to your member countries in Latin America and Asia that the IMF has to support some European countries, which are among the richest in the world?
We have 188 members and we are here for all of them. There are clear rules, and if under these rules a country is entitled to receive support, then we provide it. Times change. Forty years ago, we supported Italy and the UK, then the focus shifted to Asia and Latin America, and now we are active again in Europe. But most of the programs that we support are still in Africa.
But nowhere do you spend as much money as in Europe. Surely, not everyone approves of this.
Last year we increased our resources because we wanted to have enough firepower so that we would be able to support our member countries. Many emerging market countries participated in this initiative. They did not do it out of generosity, but because it is in their interest to end this crisis. But for the IMF the principle of evenhandedness is important: there should not be special treatment for individual member countries.
But isn’t there already? You pushed for debt restructuring in Greece, because the IMF can only lend money to countries with sustainable debt. The German government was opposed.
Eventually we came to terms (laughs). It was hard work, but you work through it.
Your relationship with Wolfgang Schäuble was put to the test.
Where did you get that?
He was your main opponent on the haircut.
We do not agree on all points, but I certainly highly respect him.
Would you describe him as a friend?
Oh yes! He is a friend.
Is friendship in the positions you both hold even possible?
Yes. When you are in Brussels or elsewhere together in these long crisis meetings, you get to know people very well. You learn quickly what makes them tick, how they approach issues, how they behave in certain situations. You can tell very quickly who you like—and who not! (laughs)
The German government is pursuing economic policies that hardly anyone shares internationally. What is the problem with the German position?
I do not think that there is one single German view. After all, there is a lively debate also in Germany about the right way out of the crisis. But German economic policy has certainly been shaped by a tradition in which the supply side plays an important role. The demand side of the economy, on the other hand, is less of a focus. John Maynard Keynes ...
... the British economist and founder of demand-side economics ...
... has not left that many traces in Germany.
Can you identify with the German position?
I am a lawyer by training. As such, I have a strong understanding of the importance attached to constitutional principles in Germany. I think that is a good thing.
But it limits the ability of policymakers to react flexibly in crisis situations. That's why many Anglo-Saxon economists criticize the German approach.
I believe that the German government has shown a degree of flexibility within the parameters of their own principled assessment. Take Greece. Chancellor Merkel has said if the country delivers on the program and achieves a primary budget balance, then there would be a time for further debt relief if necessary.
Because she wanted to keep the issue of Greece out of the election campaign.
That I cannot judge. But I believe that essentially it is a very intelligent combination: an approach that says, I will help you if you are doing your part. This tit-for-tat approach seems sensible.
Although you are praising the Chancellor now—many of the measures which the IMF supports are controversial in Germany. For example the bond purchase program by the European Central Bank (ECB), which you supported.
Yes, we do support that—strongly. Our recommendations are the result of decades of experience in dealing with crises around the world. This institution has accumulated a lot of knowledge.
Many fear inflation!
I know that the issue of inflation in Germany is sensitive, not least because of its historical experience. But the ECB's mandate is to keep inflation close to, but below 2 percent. I am convinced that it will not do anything to jeopardize this goal.
In recent weeks, financial markets have stabilized. Is the worst behind us?
Our forecasts predict that the euro area economy will perform better next year than this past year. This is based on the right policies being implemented and the right choices being made. Provided that happens, we expect growth to accelerate.
Where will growth come from?
A bit of support will come from outside. We believe that global economic growth will accelerate. Recently, we have been seeing some positive economic indicators in the U.S., China and other emerging economies. There are also signs that the counterparties in the U.S. budget dispute could be converging. But the Europeans must do their homework.
What are they?
Monetary policy needs to remain accommodative, the ECB’s bond-buying program must be fully functional, and banking union must be completed. And there should be further moves towards a better fiscal union.
But right now, it doesn’t look like it. Although they have indeed agreed on a joint supervisor under the umbrella of the central bank, but the resolution mechanism for ailing banks that many experts demand, is nowhere in sight, because the Germans are blocking it.
I am an optimist and I believe in Europe—and also the fact that the journey that our predecessors began when they adopted the euro is not yet over. I think that there is momentum now, and that has to be used. The supervisory mechanism has been established and a cross-border resolution regime will be the next step. That will also be hard work, but I believe it will lead to good results. The Europeans can count on our support in this regard.
How long will the IMF remain active in Europe?
We have many roles—policy advice, technical assistance, lending. We are participating in the financing of the rescue programs, because it was the right thing to do. That was also a challenge for us because we had to act jointly with European institutions and find a consensus.
And now you’ve had enough?
I did not say that. But we do not have to be engaged financially in every case. There may also be cases where we will focus more on designing and monitoring adjustment programs. I get the impression that many countries value our independence and expertise in dealing with crises.
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