Lagarde urges collective action to restore confidence

15 September 2011

Lagarde argues that as uncertainty continues to roil the world's financial markets, world leaders should act together to address the three main challenges facing the global economy: debt pressures sapping growth, risk of instability in the core of the global economic system, and social tension.

“I believe there is a path to recovery, much narrower than before, and getting narrower. To navigate it, we need strong political will across the world―leadership over brinkmanship, cooperation over competition, action over reaction”, IMF Managing Director, Christine Lagarde, said September 15 at the Woodrow Wilson Center in Washington, DC She made her remarks ahead of the Annual Meetings of the World Bank and IMF, where world economic leaders are expected to discuss the global economic outlook and look for ways to restore confidence.

In the short run, a key issue weighing on the recovery is the debt overhang in advanced countries. In the United States, debt-laden households remain reluctant to spend and need some relief. In Europe, uncertainty about sovereign debt sustainability continues to undermine confidence, and European banks need sufficient capital buffers to support growth, Lagarde said. “Weak growth and weak balance sheets—of governments, financial institutions, and households—are feeding negatively on each other, fueling a crisis of confidence and holding back demand, investment, and job creation.”

To address the rising risks that major economies may slip back instead of moving forward, four key policy dimensions need to be addressed by policymakers, Lagarde said.

• Repair. Advanced countries need credible medium-term plans to stabilise and lower public debt ratios. But consolidating too quickly can hurt the recovery and worsen job prospects. So the challenge is to navigate between the twin perils of losing credibility and undermining growth.
• Reform. The financial sector in particular needs further reform. Substantial gaps remain in areas like supervision, cross-border resolution, too-important-to-fail, and shadow banking systems. International cooperation is needed across all dimensions to avoid regulatory arbitrage. Reforms are needed in other areas as well, including job-creating measures.
• Rebalance. First, demand needs to shift back from the public to the private sector, when the private sector is strong enough to carry the load. This has not happened yet. Second, we also need a global demand switch from external deficit to external surplus countries―with lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery.
• Rebuild. Low-income countries in particular need to rebuild their economic policy buffers—including fiscal positions—that served them well during the crisis, to protect themselves against future storms. This will also help provide the space for growth-enhancing public investment and social safety nets.

Lagarde noted that the IMF—with its 187 member countries—is uniquely positioned to foster collective action among its global membership.

The IMF can help identify risks and opportunities arising from the interconnectedness between economies. Through its policy advice, the IMF can shine a light on the key issues—growth, vulnerabilities, and spillover effects—and help guide international cooperation. IMF financing can provide breathing space for countries to overcome immediate economic challenges.

In the longer term, the IMF can also help construct a safer and more stable international financial system.

Press release

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