U.S. Chamber of Commerce building, where Lagarde spoke to business leaders on the global economy (photo: Manuel Balce Ceneta/AP/Corbis)
LAGARDE SPEECH
“What happens elsewhere in the world—be it the success of recovery in Europe or the continued smooth functioning of supply chains in Asia—matters increasingly for the United States,” Lagarde said. “The converse is also true. What happens here matters increasingly for the global economy.”
Her remarks, which focused on the interplay between the global economy and the U.S. economy, also highlighted the need to find joint solutions to secure a lasting, balanced and widely shared global recovery.
“Job creation is a critical ingredient of any economic recovery, domestic or global,” she emphasized. Businesses have a key role to play, Lagarde said, but at the same time, policymakers have an important responsibility to help “shape the environment in which businesses and citizens can thrive—and jobs can be created.”
Changing global picture
Lagarde said that global growth remains subdued, while acknowledging that the global economic environment is changing. She emphasized that economies are moving at different speeds and that the fruits of growth are not evenly shared, both in the United States and other countries.
The U.S. economy is growing and, after a long time, so is the Euro Area. In Japan, aggressive policy support and the ongoing reform process is helping to spur growth. The emerging market economies, on the other hand, are slowing. “For some, this may be a shift toward more balanced and sustainable growth,” Lagarde told the audience. “For others, it reflects the need to address imbalances that have made them more vulnerable to the recent market turbulence.”
Reinforcing the point about global interconnections, Lagarde cited the IMF’s recent “spillover” analysis, which suggests that if the world’s five major economies were to work together to adopt a more rigorous, comprehensive, and compatible set of policies, it could boost global GDP by about 3 percent over the longer run.
U.S. recovery gaining strength
Lagarde noted that the U.S. economy is gaining strength, calling this good news for America—and good news for the world economy. Although growth is still modest—well under 2 percent—it should accelerate by a full percentage point next year, Lagarde said, adding that the private sector is playing a key role as the engine of growth and job creation.
Despite signs of strengthening, the latest jobs data present a mixed picture, with employment remaining well below pre-crisis levels. “The issue of jobs remains paramount,” said Lagarde, noting that jobs and growth is an increasingly important component of the IMF’s policy advice.
Lagarde highlighted three key recommendations for U.S. policymakers, drawn from the IMF’s most recent assessment of the U.S. economy.
• Fix public finances. Fiscal consolidation could be slower in the short run, but more action is needed to reduce long-run pressures on the budget. Lagarde also warned that political uncertainty over the budget and debt ceiling were not helpful to the recovery. “It is essential to resolve this, and the earlier the better,” she said, “for confidence, for markets, and for the real economy.”
• Appropriately calibrate monetary policy. When the time comes, exit from unconventional monetary policy should be gradual, tied to progress in economic recovery and unemployment, and should be clearly communicated and in a dialogue.
• Complete financial sector reform. While there has been progress on this front, attention needs to focus on the outstanding “danger zones,” such as derivatives and shadow banking.
Global interconnections and role of IMF
Lagarde underscored the unique role of the U.S. in the global economy, noting that the economy accounts for 11 percent of global trade and 20 percent of global manufacturing. The country’s global financial ties run deep too, she said. Foreign banks hold about $5.5 trillion of U.S. assets, and U.S. banks hold $3 trillion of foreign assets.
While these interconnections have great benefits for the United States, they are not without risks, Lagarde cautioned, referring to the collapse of Lehman Brothers five years ago that ushered in “a harsh new reality” across sectors, countries, and the world.
That is why an effective IMF is important for the global membership. “Our policy advice, for example—including in core areas like exchange rates or external imbalances—has helped to prevent or to ease the hardship of crises around the world,” said Lagarde. “That, in turn, has helped reduce the possible negative fallout for the U.S. and for all countries.”
An effective IMF must also continue to evolve and anticipate what lies ahead. In this connection, the IMF has placed greater emphasis on global interconnections—the economic spillovers between countries and the financial sector. Lagarde also highlighted the set of governance reforms that the IMF is working toward that will help strengthen its capacity to prevent and resolve crises, and at the same time, help broaden its representation to better reflect the changing dynamics of the global economy. “These quota reforms need the support of all our member countries—including the United States,” she said.
The IMF is grounded in the principle of good global citizenship. “If countries work together to serve the common interests, everybody wins,” she concluded. “We all have a large stake in these interconnections.”
