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“We have seen some improvement in the economic climate. But let me also underline this point: the risks remain high; the situation fragile.”
She called on policymakers to take this "opportunity to push on and take the further actions that are certainly needed to keep the crisis at bay and finally put it behind us".
Policy actions in Europe and elsewhere have helped to reduce vulnerabilities. “The steps taken by the Europeans in recent months are a timely reminder of the power of policy resolve and action.” Through that hard work, “we have earned a bit of time to think through and to actively pursue what still needs to be done”, Ms Lagarde said in a speech at the Brookings Institution in Washington, DC.
Given the risks posed by sovereign and financial stresses, European policymakers should “keep up and build on” their efforts, including through strong country-level policies, support from the European Central Bank, repairing the banking system, and fiscal integration. “The much expected decision of euro area ministers to strengthen the European financial firewall has also been crucial”, she said.
In today’s interconnected global economy, however, Ms Lagarde noted that a stronger European firewall can only ever be part of the solution. A stronger global firewall will help complete the “circle of protection” for every country, including those not immediately affected by the crisis.
Ms Lagarde said that the human costs of the crisis are an important reminder of why further action on policy reform is needed. In travelling across the IMF’s member countries during her nine months as Managing Director, she had seen the cost of economic instability and unemployment—“the hardship, the loss of dignity, the economic loss. It is the same in all countries".
“The immediate focus of policies must therefore be to support growth where it is still weak” and help generate more demand. In this regard, monetary policy can “support growth where inflation remains in check”.
On fiscal policy, she noted the imperative in many countries “to restore sound public finances”. In this regard, the “pace of adjustment matters” should be “calibrated in line with country circumstances”.
Ms Lagarde also urged policymakers to seize the moment to build a stronger long-term foundation for growth and stability. With the right reforms, the world can harness a new type of growth that is more inclusive and more durable. She highlighted the importance of further action on financial sector reform; in restoring competitiveness; and in helping to build better functioning labour markets. Given the difficulty of many of these reforms, she also called on policymakers to “protect and reinforce appropriate safety nets”.
In concluding, Ms Lagarde emphasised that “through a collaborative approach, we have a better chance of success”. The IMF, with its 187 member countries recognises “what can be gained through collaboration”. She added that it was important that the Fund’s governance structure should fully reflect its membership and, in this context, she urged “all member countries to complete the 2010 quota and voice reforms in a timely way”.