Challenges and Opportunities for the World Economy and the IMF

Tuesday, July 26, 2011

Christine Lagarde, managing director of the International Monetary Fund (IMF), discusses fragility in the global economy and how the IMF can mitigate international financial crises.

This meeting was part of the C. Peter McColough series on International Economics.

THOMAS GLOCER: Well, good morning. A fantastic turnout for an early summer day in New York, and I'm not surprised why. Welcome to the Council on Foreign Relations meeting with IMF Managing Director Christine Lagarde. It's part of the continuing C. Peter McColough Series on International Economics at the council, but today indeed is a very special day.

I will not take much of your time with an introduction, largely because of the remarkable speaker who follows, who you know well. I should mention she's been managing director of the IMF for only three weeks, and I'm told this is her first major policy speech, so we're really fortunate.

She was also, of course, the first woman to run the French Ministry of Finance and Economics -- and for me, an old lawyer, and most remarkably -- the chairman of Baker & McKenzie, a large international firm. Most heads of law firms don't immediately go into the French Cabinet, let alone ones based in America. So this is truly a remarkable woman and a remarkable career.

And with that, I shall turn it over to her. After the session I'll do a quick Q&A directly, continue the conversation, and then turn it over to you for questions. Thanks. (Applause.)

CHRISTINE LAGARDE: Thank you very much for the introduction. And good morning to all of you. Delightful to be back in New York.

If I was to write to my mother today to say that I was in New York and that I was utterly astounded to see men and women come to breakfast at 8 o'clock in the morning -- (laughter) - carefully dressed for the whole day -- (laughter) -- she would be happy, if she was alive.

But what I would be doing is simply copying Alexis de Tocqueville back in 1831. (Laughter.) He was surprised. (Laughter, scattered applause.)

Now you didn't come this morning to hear me about Alexis de Tocqueville, although "De la Democratie en Amerique" is a beautiful book. You came this morning to hear me talk about anything in particular -- Greece, debt ceiling, sovereign debt -- (laughter) -- growth, social instability. What can the IMF do about it? I suppose that's really what you're interested in.

So my speechwriters have done a very nice job producing a text that will be made available, I suppose, for the journalists who are sitting at the back of the row. And I might not use those notes very much, if I may, although obviously I'm very grateful for the good work that they've done. (Laughter.)

So what are the major challenges that the world economy is facing at the moment? I think I've been narrow-minded and yet with (a broad ?) spectrum by mentioning sovereign debt, growth and social instability. And I'm going to just say a few words about each of the three and then try to address how the IMF can actually help in respect of those issues.

You have to, by the way, be indulgent with me, because I've been in the job for exactly 22 days. I came very abruptly, as you know, under circumstances that you're all familiar with, having worked for four years as minister of economy and finance -- in charge also of employment and industry, with varying titles -- over the last four years. And I'm clearly in a learning and a listening mood, and I actually feel like a big sponge, absorbing as much of the knowledge and wisdom that I find in the Fund, which has the most extraordinary and talented staff that I could ever think of.

I was -- I was very surprised -- you mentioned my legal background. I was very surprised, actually, when I joined the Ministry of Economy and Finance, to see that there were so many talented people prepared to work extremely long hours for such a low salary. Well, it's not that different at the Fund. And I'm not commenting on compensation policies, but the talent, the dedication, the willingness of people to work hard and to address national, multilateral, multidimensional issues in a very, very skillful and intelligent way with an international -- an international spectrum is actually spectacular.

Now the challenges that we're facing include, obviously, prime and foremost, the sovereign debt issue. There was a lot of talk about the European sovereign debt, there is now a lot of talk about the U.S. sovereign debt, and I think that we should have an open mind as to the spectrum of that sovereign debt issue.

Turning first of all to Europe, you remember one year ago -- a little over one year ago, in May 2010, a package was put together to actually rescue Greece. That was followed by the setting up of a European financial stability fund to try to address the systemic issues in relation to countries that really were at the periphery of Europe, because if you include the GDP of Greece, Portugal and Ireland, you hardly hit the 6 percent of total GDP mark. So this is a relatively small problem, and yet it developed into a systemic issue that had to be addressed at the time and clearly was not sufficiently addressed. Later on, you had Portugal, you had Ireland, and in each and every case, for different reasons, different rationale, the issue of sovereign debt came to the front.

Now what happened last week, on Thursday, precisely, was in my view vastly different from what happened a year ago, vastly different because, in my view, and for having participated in many of those meetings and many of those summits, for the first time, I saw euro area members' leaders actually decide to come together, to close ranks and to put money where their mouth was.

Now you'll say: What's different compared with a year ago? Well, compared with a year ago, not only did they address this particular issue of Greece by significantly extending the maturities of the loans, by slashing the interest rate, but they also made a general commitment that for any country under program, that is under this joint program that is sponsored both by the European Commission, funded by the euro area members and the IMF, with the surveillance of the ECB -- for any of those countries under program, provided that they deliver under the program -- and that's obviously an important conditions -- for as long as that delivery is obvious, the other euro area members will continue to finance until there is a return to the market. And that's a major commitment, because it gives a financial footing that actually protects those countries that do what they're expected to do.

Now whether that will be sufficient to convince the markets remains to be seen, because markets are always in trepidation, and they expect the worst rather than the best, provided that their interest is well taken care of. And clearly, they don't like uncertainty. And what, from an IMF point of view, remains to be done, is clearly implementation and its implementation on the part of those countries directly concerned by a program. That is clearly the case for Greece, and that was clearly lacking in the last few months. But it's also a matter of the governments themselves to actually deliver on the plan that they have signed up to on Thursday. And that obviously remains to be seen. It's going to take place in the weeks to come. It's not going to happen overnight, because, as is often the case in many advanced economies of the Northern Hemisphere, August is relatively quiet, and parliaments are closed, and Congress is away, and so on, and so forth. So it's going to be a matter of time, but they don't have the luxury of time. I think that there is an expectation that things now have to happen and have to be delivered, not only on the part of the countries directly concerned, but also on the part of the governments that have actually, as I said, put money where their mouth was.

Now I'm certainly hopeful that this brave political move -- which, in my view, is really possibly a major shift in the European construction, leading the way to fixing this monetary union that was only half constructed and not completely defined -- I hope that this courageous move will be followed as well in the United States and that the -- that fiscal action will be taken as rapidly as possible.

Now, unfortunately, there's one thing that we cannot change, and that is the passing of time, and the clock is irremediably ticking, and people have to really try to find the appropriate solution. I'm not going to comment on one plan or the other. It's not for me to say. But there has to be sufficient plans in order to address the issue of sovereign debt, of the debt ceiling, because, frankly, to have a default or to have, you know, a significant downgrading of the United States' signature would be a very, very, very serious event, not for the United States alone but for the global economy at large because the consequences would be far-reaching. It would not stop at the frontiers of the United States. It would go beyond.

Now what does fiscal consolidation mean? Does it mean that it's going to stop growth? There's this huge debate going on as to whether or not the austerity measures that are being decided -- that we actually recommend, in many cases -- will be a hurdle to the recovery and the picking up of growth. Well, certainly our studies show that in the very short term, there can be a negative effect from fiscal consolidation. And to be precise, our studies indicate that a reduction of 1 point of the deficit in many instances entails a reduction of .5 points of the growth number.

So there are short-term consequences as a result of the fiscal consolidations that are needed, which is why it is most helpful, actually, to provide for fiscal consolidation, but to make sure that they will actually affect the economy at a time when the recovery is a little bit consolidated. So that's essentially the recommendations that we have been given on a consistent basis not only in relation to the United States, but in relation to many of the fiscal consolidation policies that we recommend throughout.

Now I mentioned Europe. I mentioned briefly the United States. I don't think that we can be blind to Japan. Japan is another country where the sovereign debt is extremely high. It is borne domestically, in the main, and that is a critical support for the country, but still it's not an area of the world that should go by the by simply because it has been heavily indebted for a long time. And there too important fiscal consolidation measures are recommended by the Fund.

Now that's a major issue, and it's one that is very, very intimately connected with another one, which is that of growth, because to actually address the issue of sovereign debt, particularly in the advanced economies, well, clearly we need to have sustainable, solid and balanced growth. Those are the three magic words that you will see very often associated with growth: solid, sustainable and balanced. And if there is a sufficient level of growth, then clearly it has an effect immediately on the sovereign debt issue. And no matter how much fiscal consolidation is conducted in certain countries where growth is absolutely sluggish, it is not going to restore the sustainability of the debt of that country. So they're both very, very intimately linked.

What does the Fund forecast in terms of growth on a global basis? Those numbers have been slightly revisited back in June, and the number that we have for throughout 2012 is anywhere between 4 and 4.5 percent overall growth. That's not bad. Unfortunately, it'sextremely uneven, and you have, obviously, emerging market economies as well as low-income countries driving the growth process, while at the same time, the advanced economies are lagging behind, for obvious reason.

Now the reason some of those emerging markets are showing such good numbers is clearly as a result of good policies that they have put in place, good policies following generally moments of great financial distress. Remember the Latin American '80s, the Asian '90s, and clearly, measures have been taken since that too address the situation of those countries.

On the low-income countries, what I would like to simply mention is that if their numbers are quite encouraging and more encouraging than in the advanced economies, they're also facing major issues, in particular in relation to commodity prices. This is a topic that the G-20 had decided to address about a year ago and that is clearly rising on the agenda. When you look at what's happening in the Horn of Africa, in countries like Somalia, for instance, you can clearly tell that the issue of commodity prices and, more importantly, of food crisis are coming to the forefront of the agenda. Here the IMF has helped, helps and will continue to help with special facilities that can actually be made available without conditionalities, and that is clearly the intention that we have in relation to some of those countries.

I'm still, you know, giving a quick look at my speech just to make sure that I cover about -- all issues, just in case. (Laughter.)

Now I mentioned three characterization for that growth that we all look for: solid, sustainable, balanced. But that's not the only purpose. Growth in and of itself is great, but if it is without creation of jobs, whether in the United States, in Europe or in other places in the world, it's not going to help much. It's going to help financially, but it's not going to help socially, and at the end of the day, this issue of social instability that is the result of high unemployment, low level of education in some countries, very high expectations particularly of the young -- the young populations in countries such as Tunisia, Egypt and most of the countries around the southern rim of the Mediterranean, as we have seen during the Arab Spring, is a critical issue.

So that comes to my third topic: growth necessary to actually fix the issue sovereign debt -- not sufficient in and of itself, but necessary -- sustainable growth, and to be sustainable, actually, that growth needs to create jobs.

And the issue of social instability is, in my view, the third major factor that we should have on our radar screen. Social instability can be addressed by what -- by, essentially, the expectations that will be met by reality. And that -- by that I mean, actually, employment. When you look at the rate of unemployment, not only in this country, but in many, many advanced economies, as well as in emerging markets, it is an issue for everybody.

The risk of overheating is peculiar to the emerging markets, but the risk of unemployment and the risk of social instability is common to all economies around the globe. We might take exception with Germany, but I hope we can come back to that in the -- in the questions later on.

Now, with that as a background -- sovereign debt, growth, social instability -- what can the IMF do? As I said, in relation to countries in the Horn of Africa, there are particular credit emergency facilities that we can use, but what can we do in general? Is the Fund relevant?

Well, point number one, the Fund about three years ago was a fading-out institution, one that was not particularly necessary or helpful, one that had financial difficulties. And then came the crisis. And the good news from the Fund perspective -- it's not fair to say that -- is that the Fund will continue to be in business, because the Fund is actually relevant when there are crisis -- crisises (sic). And clearly, we're not short of that at the moment. So the fund is clearly, and has been, back in business.

The previous managing director, Dominique Strauss-Kahn, did a very good job at resetting the IMF as a credible partner, as a source of intellectual caliber of the highest level. And that has been much appreciated, in addition to having the right level of resources in order to address the crisis that we went through. Doubling the resources of the Fund at the time of the crisis was actually a very brave move. It wasn't guaranteed, because there are a lot of countries, not just the United States, that are a little bit hedgy about, you know, increasing the resources of an international institution, but doing so at the time of the crisis was exactly the right move. Question is: Do we still have the level of resources that is now needed and appropriate to address the crisis -- the crisises (sic)?

So the Fund is back to being absolutely relevant, is back to being needed. And if I look at the various programs around the planet, we have, you know, a range of over 40 of them, and some of them very significant in size. The Fund is needed not only because it provides the level of resources, not only because it is able at designing a program associated with what used to be called conditionalities, and which people are a bit -- a bit fussy about; but also because it is good at providing technical assistance, and it is good at checking that the discipline of the program is actually respected. And it is for that reason in particular, if you think of it, that leaders of European governments have actually insisted that the Fund be part of the equation when it comes to actually addressing and fixing a crisis.

So it has the resources -- maybe it could do with more -- it has the talent; it has the expertise; it has the ability to compare; it has the ability to benchmark; it provides excellent surveys, analysis of high caliber. "What can it do better?" is the question that I asked myself before I applied for the job.

And here, I bring a little bit of my sort of strange, combined background as a lawyer, as a former chairman of an international firm, and as minister of finance for four years and minister of trade for two years. And I think to myself: The best way to preserve, enhance and develop the institution for the good of all -- because that's ultimately the purpose of the Fund -- is to act for -- in the general economic interest of the entire community -- is to make sure that we actually focus our efforts to respond to our clients' needs.

We had a very interesting debate, internal debate, about who is the client? And it's obvious that the overarching ultimate client is the global community, its welfare, the improvement of economic conditions and, more importantly, international monetary stability. There's a lot to be done there.

But who do you talk to when you want to get client feedback? How do you know that you are actually doing the job? How do you know that what you are providing is appropriate? Well, clearly, you have to move one level down and see what it is that overarching client comprises. And that overarching client comprises members -- the members of the institution. The IMF includes 187 members at this moment. Sudan might be a newcomer one of these days.

But at the moment, 187 countries are members of the IMF, and those countries are effectively asking for services, paying for their fees, they have their quota, they can draw on them, and they are permanent users of the Fund. So we need to make sure that the Fund remains client-focused and actually addresses the demands of such clients.

I know it's a little bit unusual to use this word in the institution, but I will be determined to actually use that. And it's a dichotomy. There is the overarching client, which is the overall economic good of the entire community, but we need to actually focus and address specific needs of the members and serve all members in an even and fair way. So client focus is my sort of number one.

My number two, which I think should be looked at very carefully and analyzed extensively on a regular and consistent basis, is the issue of connectiveness. You know, if you analyze on the one hand the macroeconomic aspects of a particular policy, and if you severed that completely from the prudential aspect of a particular sector -- clearly the financial sector, for instance -- and you don't link the two, I think you run the risk of missing a great element of connectiveness between the components of an economy. And the same applies, actually, to what happens if one country decides on a particular policy and is totally oblivious to what happens to the other economies.

Now, that was (posited ?) by my predecessor and by the team. So we now have spillover studies. That's how they're called. You know, you take the policy, the economic policy of the country, and you determine what the policies -- how the policies are going to affect other countries, other regions and the global economy at large. So those spillover studies that are conducted at the moment only in relation to five systemic economies. That is, if I recall, the United States, China, the euro area, the U.K. and, obviously, Japan. So we are doing those spillover studies. We are in the beginning of it. And we're going to aggregate them sufficiently so that actually it makes sense from a comprehensive point of view.

And that's my third C. You will that it all begins with a C: client focus, connectiveness, comprehensive.

And on the issue of comprehensiveness, clearly we have to draw on all the resources of the Fund. There are fantastic talents in the organization. They often have to work in a more cohesive and comprehensive fashion. And that will be the topic of a consolidatedreport that will be released at the time of the annual meeting of the IMF, where we address both the global economic outlook as well as the financial and the fiscal aspects of those economies.

And finally, I need -- I'm in search of my third -- fourth C. So I had client focus, connectiveness, comprehensive, and the third (sic) one is the issue of credibility. I've mentioned that, since the crisis, the Fund has become relevant again, for many reasons. But it needs to sustain that relevance -- relevancy -- by being actual credible.

To be credible, there are many attributes and many principles to be respected. Quality is an imperative. It's obvious. But more importantly is the issue of even-handedness, of fairness and of appropriate representativity within the organization. The Fund was very well operated for a long time on the basis of principles and allocation of powers and a governance system that was based on the advanced economies run the show.

And I've read many good articles about the fact that I should not be here speaking in front of you, because Europe should be on the back seat. Well, as I claimed, and as I will continue to claim and demonstrate, I'm not a French national, I'm not a European representative, I am the managing director of the IMF, which includes 187 members.

And all those members must feel that they are equally, fairly, even-handedly represented within the organization. And that will be clearly a topic that we will address, including at the annual meeting. It's continuing the quota reform. It's making sure that there is delivery against the promises that have been made. It's also making sure that in the staff of the organization we have appropriate representation from all corners of the world, provided that the quality is there.

So this issue of credibility is clearly one that I will want to address, together with that of diversity, which I think is also very closely interlinked.

Now, in conclusion, I will go back to the founding fathers -- one of the founding fathers of the institution, Lord Keynes. What did he say in 1946 in his Savannah -- (word inaudible) -- speech?

He said, I want the institution -- he said the institutions, because he was also referring to the Bank, on the other side of the street -- I want them to be endowed with three particular attributes. One is a fully collared coat so that it remembers all the time that it is representing all members in the Fund, international by essence, by nature. Number two, a good box of vitamins, because the members of the Fund must have the energy and the ambition and the audacity to actually tackle the issues, including the most difficult one. And finally, he said, I want this institution to have the wisdom, the patience and the discretion to address all those issues.

I'm not sure about the third one, because I think that can easily be acquired if we have the right level of humility, and that will be certainly my task. But I can assure you of the level of energy -- although my voice is gradually going away -- and I can also assure you that the collared coat is something that I might not wear on a day-to- day basis, but that I will have that very much internalized so that I'm always a member of the entire community.

Thank you very much. (Applause.)

GLOCER: Thank you. Well, I don't think the question of wisdom should be in any doubt in that threesome.

I would like to remind everyone that this session is on the record. We have members of the council participating from the Washington office as well as by audio hookup from other places. And I am just going to start you all off with three questions. I have a list of 20 things I'd love to know, but I'm sure you'll propound those questions in a better way than I.

The first question, Christine, I'd like to ask you about is Greece. You mentioned earlier that the clock is ticking in general. Clock might be the fourth of your Cs.

LAGARDE: Fifth. (Laughter.)

GLOCER: Fifth. Yesterday -- there's inflation even in the Cs. (Laughter.) Yesterday it looked like the markets had the predictable reaction, which was not sure whether the measures in Greece were enough. Could you comment a little bit upon Greece in particular and then more generally on the phenomenon of how do policymakers move quickly enough, given the political considerations that you've mentioned, to get ahead of and do a fire cut rather thanseemingly constantly coming a little too late with something which isn't quite enough, or at least that's the perception?

LAGARDE: OK. You're absolutely correct in your assessment of the market reaction. So the first day, on Friday, there was -- well, shouldn't say that. On Wednesday and Thursday, there was anticipation that a deal would be done and that the crisis would be -- would be at least if not dealt with, but addressed properly. Friday, yet again a little move up, and then Monday, after the weekend, people have looked at the agreement, maybe, and talked among themselves a lot and decided that it wouldn't cut it, maybe, or maybe it would.

And I think there is still a level of uncertainty out there, which is due to, number one, the fact that it's a complicated agreement if you look at it, and number two, there is still work to be done. It's complicated in that it addresses the issue of the Greek situation at large: liquidity, good reduction of debt, and more importantly -- and that's really something that has gone very much unnoticed -- in Article 10, if I recall, of the agreement between the members, they actually say specifically, which they had never done before -- and that goes to the point of is it a (transfer union ?) or not, and how much do we -- are the Europeans prepared to do. They actually say, you know, the euro -- the euro area members will continue to support countries under program until they restore access to market, provided that they deliver under their program.

Now you see, this is very interesting because it's a move that they had never made. It's -- it includes the consideration that is certainly expected by those member states that will actually finance and fund, because it says if you deliver, if you implement, if you -- if there is no slippage in the program, we will be (a rendezvous ?) and we will finance. That's a major undertaking, certainly from our point of view.

So that's -- on the Greek issue, which is obviously coupled with the long-winded negotiations between Greece and the financial sector, which has led to those four options available to the banks and financial institutions to actually roll over or exchange, and by the same token, reducing, you know, the net present value of the Greek debt. MORE Those are two major components: massive euro support, long-term as well, provided that there is delivery on the other side on the part of the country that benefits; private sector involvement and extension of the reduced interest and extended maturity, not only to Greece, but also to Ireland and Portugal.

But that's not, in and of itself, sufficient, which is why they went further and they decided to actually fix the European Financial Stability Fund (sic). Why do I say "fix"? Because it's already about 440 billion euros -- which is not insignificant. But they fixed it because they said -- or they realized that it had to be more flexible. It had to be able to give guarantees; it had to be able to go on the secondary market; it had to be able to be used as a precautionary instrument.

Now, some might argue that to be used to purchase on the secondary market, the ECB has to actually acknowledge that there are exceptional circumstances. That's fine, because it could have been used in many instances that we've seen lately, so it's OK.

And the fact that all members were prepared to actually bring that level of flexibility about is to me an indication that they're willing to go further. And to go further is actually later down in the agreement, where they say that they are going to actually implement this economic governance that has been lurking around and that has never been really confirmed. You know, and that issue is really a critical one. And it's on that one that I think that they should be held to a test: Are they going to deliver on that? Will they fund -- find agreement with the European Parliament to make sure that, in case of failing to comply with the rules, there is sanction, there is warning, there is the level of accountability to the other members? That's going to be a very, very important one.

Have I addressed your question? Not quite.

GLOCER: You have. But one short follow-up -- not counting against my three -- (laughter) -- is, you mentioned, you know, going far enough. It has been suggested by some -- better economists than I -- that all we've really done in Europe is substitute a series of what were currency crises before with a much larger and deeper credit crisis, by going, you know, towards a deeper economic union but not a political union. It seemed, as you mentioned, in the latest Greek maneuvers that there is a sort of sense that one has to go further by way of political integration. LAGARDE: Mm-hmm.

GLOCER: Where do you think Greece leaves us now, as people step back and reflect? Do we have the balance between economics and political integration right in Europe, or must we go further?

LAGARDE: The euro area members have indicated that they want to go further. And there was clearly something lacking: this ability to actually stop the contagion, have this deal between the European Central Bank and the euro area members. I think that -- those were two critical steps taken with a view to enlarging not the size of the euro area, but the depth of the integration.

And, you know, I'm not sure that there will be a political integration because, you know, politic is local, politic is at home. But in terms of economic integration, that's the path that they are taking, clearly. And there was monetary integration. There was that common good that was the euro, which was their common currency, but there was no economic integration. There was this growth and stability part that was nice to have, and that had been breached by Germany and France in the -- in 2004-2005. So that had to be addressed. That has to be remedied, and that's exactly the path taken.

GLOCER: Now, question two -- related, as you'll see. Last week, we saw many images of you with Chancellor Merkel and President Sarkozy, as part of the sort of French-German agreement on Greece. It also raises a very interesting comparison of the two economies. You know, how is Germany -- why is Germany doing so well? There's an article in this month's edition of Foreign Affairs by Steve Ratner, essentially asking the question -- entitled what do we have -- "What Can We Learn From Germany?" You've had a wonderful insider's view of that. My children, on their tests in school, often get the question: Compare and contrast France and Germany. (Laughter.) Take that any way you'd like.

LAGARDE: All right, we will not discuss beer and we will not discuss food. (Laughter.)

GLOCER: You win.

LAGARDE: Right. Well, the -- one of the beauties of the Fund, by the way, is that ability to compare, to benchmark, to assess, you know, the recipes that have been used in various countries and to make recommendation on the basis of that, you know, benchmark data that we have, which is -- which is incredible, and which, you know, no organization has around the planet.

If you look at the strength of the -- of the German offer -- and here I think again in terms of comparative advantage -- Chancellor Schroeder, in his wisdom, and -- you know, hats off to his political courage, because he effectively, you know, cut himself off any re- election -- started this program back in the early -- at the beginning of the century, that he called the program of the 2010 Plan --

GLOCER: Plan 2010, yeah.

LAGARDE: -- Plan 2010. That's what's the -- the word. Plan 2010.

But in that Plan 2010, he took some very, very bold measures, both in terms of pensions, in terms of productivity, in terms of competitiveness, in terms of focus as well. And when you look at how German is positioned on the -- on -- you know, in the grand scheme of things, on a global basis, Germany's positioned in those markets where it adds maximum value. It's very high in the value chain. And as an alternative and sometimes as a complement to that, it is in those sort of brand niche or brand markets that you associate with quality, with luxury, with technology. And by combining the two or using alternatively one or the other, they have really put themselves in a place where they don't suffer so much from labor cost disadvantage, relative to others, and you know, taking productivity aside. And they don't suffer much from the quote-unquote "high value" of the euro, which is often argued by other euro area member states.

So the efforts that was -- that were conducted at the time are paying off now. And you know, how long will it take to -- say, you know, one of the major emerging economies to catch up, to have a sufficient level of investment and to have the sufficient degree of technology, research, development, training of engineers to actually match the skills and the technicity of the German companies, including the Mittelschacht, because --Mittelstadt -- Mittelstand, because that's also one of the beauties of the German economies, that throughout the chain of companies, ranging from the SMEs to the big -- large players, they all have an international brain, and they think global rather than purely domestic.

Now one -- there's one benefit that Germany has taken advantage of, which is not necessarily a good thing from an economic point of view, and that is its demographics, because Germany is losing active population now and has done so for the last two or three years. So in terms of addressing the unemployment issue, they have a benefit over,say, the United States or France, where the active population is growing. But from a pure economic point of view, a shrinking a population is not necessarily good news.

GLOCER: Will they need another East Germany in 10 years? (Laughter.)

LAGARDE: (Chuckles.)

GLOCER: I won't go there.

Last question: You mentioned your predecessor, Dominique Strauss-Kahn. As a woman coming into the IMF at this time of internal upheaval, how has that been? What can you -- I'm sure the audience is interested in -- has it been an advantage to come in? Was it a male- dominated culture? Will it be different?

LAGARDE: You know, I come from universes where it was much more male-dominated culture than the IMF -- (laughter) -- much more so. When I see the proportion of women in the Fund, in the range of 40 percent, and I compare that with my previous legal environment, if I counted the number of partners at my firm in those days, it was more than half of that. It was, you know, 9 percent when I joined.

And if I look at the banking community, for instance, that I had to work with a lot in the last four years, it's much more male- dominated than the Fund.

So I don't feel uncomfortable at all. I never did, actually. But no, it's been -- it's been a very, very warm adventure. Let's put it that way.

There's something called the hometown meeting at the IMF, where all the employees, all the staff get together and they hear whatever the managing director has to say. And I must say that, you know, coming into that huge hall with the flags in the back, with all sorts of colors, faces, ages and obviously of both genders welcoming me, was a very, very exhilarating experience.

GLOCER: That's nice.

OK. I'm going to open it up to the audience. Please wait for a microphone. Stand up, if you can. Identify yourself and organization. And if we have time, I'll also take some electronically.

Why don't we start here, in the front row.

QUESTIONER: Thank you very much. I'm Padma Desai. I'm the Harriman Professor of Economics at Columbia University. You mentioned, madame, at the start of your speech two -- several emerging market economies contributing to global economic growth. In the process, they're already attracting short-term capital inflows. Their exchange rates are moving up, which is hurting their export competitiveness. My question: Would the IMF recommend short-term capital account controls on these economies so that they can maintain solid, sustainable, balanced economic growth?

Thank you.

LAGARDE: There's one other component that I'm sure you would have mentioned as well, which is rising inflation cost, which is also a threat that some of these emerging markets are facing. The Fund has actually slightly changed its view on this matter. And, you know -- and I believe that the value and the virtue of the Fund is to have an open mind and not to be constrained and constricted by economic doctrines simply because those doctrines have been around for many, many years and have been observed as such for many years.

So I think it is, you know, to the credit of the Fund to be able to reconsider and to determine whether or not the policies that it has recommended for a long time -- that was no capital control -- was actually adequate given the circumstances.

And in the case of, for instance, Brazil or Korea or Thailand, for instance, or Chile, there have been instances where the Fund has considered that it was legitimate to actually use those capital control tools once all the other tools had actually been tried and exhausted.

Now, what we aim at as well, and that work has been done in conjunction with the G-20, is to actually try to determine a tool kit of the appropriate controls and the ways in which it can be escalated to actually provide for the -- you know, the solid basis on which an economy can remain sustainable.

But it's a big issue. It's a big issue for those emerging markets. I did not mention Russia. Russia is also one that suffers from the ins and outs in a very abrupt and messy way. And we need to -- we need to, as I said, be able to revisit our policies, re-examine the doctrine and, in the light of the practical situation of those countries and with this tectonic (plague ?) of the advanced economies and the emerging markets aligning or realigning, but with a period of transitions that will take time, we need to be able to make recommendations that might not seem as orthodox as they should.

GLOCER: Lady on the aisle, red glasses, the back. QUESTIONER: Thank you. Joanna Weschler with Security Council Report. You talked about the ticking clock in Europe, in Greece. What about the ticking clock in this country? And, depending on the different scenarios that might unfold, what will you be able to do for your client, meaning the global community?

LAGARDE: I talked about the clock irremedially ticking in relation to the United States, actually, not so much for Greece, because I think that, you know, the urging of the clock in relation to Greece is going to be now about implementation, implementation, implementation. And we need to really stick -- they need to stick to that and the euro area members need to do that as well.

I think on the issue of the debt ceiling, the clock is ticking, you know, with a much closer range and a much shorter period of time within which to adjust. Clearly, the critical objective is now to be able to -- for the United States to increase the debt ceiling with a view to avoiding a defect -- a default, which would be terrible for the United States, which would be terrible for the economy at large.

So there is a lot of political, you know, arm twisting, bargaining, bickering, and this is not for me to comment upon. But when I look at it from a purely economic point of view, that issue of the debt ceiling needs to be cracked. Absolutely needed.

Now, furthermore, and the Fund has always recommended that the issue of the twin deficits, that the issue of fiscal consolidation be addressed very sensibly with a view to not only the short term but the medium and the long term, because no country can actually have sustainable growth on such an imbalanced basis.

GLOCER: The gentleman all the way in the back, second-to- last row, had his hand up first.

QUESTIONER: Sorry. Good morning, Madame Lagarde.

LAGARDE: Good morning.

QUESTIONER: The question I'd have for you is, the big issue for Greece remains the debt sustainability. Doe the IMF think that the new deal addresses this concern substantively enough for markets, as well as for Greece itself?

LAGARDE: Well, certainly if you combine the effect of the reduced interest rate that has been decided on Thursday, the extension of maturity, which will be anywhere between 15 and 30 -- and clearly we need to model the various alternatives, because 15 is one thing, 30 is another thing.

The stock of debt to which it applies is also another matter for consideration. But if you combine that together with the private sector involvement, net of the collaterals for the credit enhancement, it improves significantly the debt sustainability analysis.

GLOCER: Gentleman -- fourth row.

QUESTIONER: Thank you. I'm Steve Friedman from Pace University.

LAGARDE: Good morning.

QUESTIONER: In the case of Greece and Europe, the control over fiscal policy has come after the fact in the form of conditionality, in effect. How does the European Union prevent a recurrence of this kind of an experience without control over fiscal policy, and how do you control fiscal policy without, in effect, delving deep into the politics of the member states?

LAGARDE: You're quite right to bring the politics into the equation of Greece under a program. What we've seen with both Portugal and Ireland was a bipartisan approach, and that was often preceded by the willingness of the party in power to eventually not be re-elected. If you look at Ireland, the party that actually negotiated the program lost the election. If you look at Portugal, the same was true. It might have lost it anyway, but they -- the leaders of those governments were brave enough, for the sake of their country, to forget about their re-election at least momentarily, with a view to reaching out to the opposition to have bipartisan support for the programs.

This has not happened in the case of Greece, and it's clearly putting -- it has put the Greek government under major strain because when you go to parliament and you need to pass a significant fiscal plan that reduces a lot of benefits and programs and pushes retirement and, you know, restricts some of the very flexible conditions that were available, and you don't have the support of your opposition, it raises the bar very high and puts you in a terrible condition. So what has been asked of the Greek opposition is to actually at least support and collaborate to a certain extent, which, fortunately, they have responded favorably to by actually agreeing to the privatization program that is part and parcel of the Greek program.

So at least there is a move in that direction, and from what I see -- and I had a good meeting with the minister of finance of Greeceyesterday -- they are effectively taking the steps that are required to succeed in that privatization program that is so needed for them. Greece has a lot of assets available, a lot of real estate, a lot of stake in the state-owned companies. It's a question of succeeding in privatizing -- private -- anyway, conducting the privatization. And they're doing so. They're taking the right advice. They're taking the right legal counsel, banking support and all the rest of it.

But what's needed on the top of that is, make sure that there is implementation. And I'm sorry to be -- to be, you know, sort of obsessed with that. It's all very well having big programs voted in parliament if, in the secondary legislation, in the implementation on the ground, people actually ignore it or, more to the point, reconstruct the little comfort zone within which they operated, we've missed the point, which is why both the IMF and the euro area members and the European Commission will actually provide technical assistance on the ground, in the ministries, in the -- in the local -- at the local authority level to actually make sure that things happen, not with a view to taking over Greece, because that's not the point -- a sovereign state is a sovereign state -- but by providing the level of technical assistance that is badly needed.

GLOCER: We probably have time only for one more question. (I promised ?) Jacob Frenkel it would be his.

LAGARDE: Mm-hmm.

QUESTIONER: Thank you very much. This is Jacob Frenkel, JPMorgan. Thank you for this great presentation.

As we look at the world today, there is really no single region that can give us a source of comfort, whether it is the U.S. or Europe, which you spoke, or China with its inflation or Japan with its crisis. That's a rare phenomenon. Now, when each region deals with its objectives, of course the spillovers may not be exactly positive to the other regions, since their crisis are of different nature. As a conductor of this orchestra, do you feel you have the tools to bring the harmony to this music? (Laughter.)

LAGARDE: This harmony is a perpetual quest. (Chuckles.) (Laughter.) I raised the issue of resources. I think, you know, in the -- in the not so distant future, we will probably have to revisit this issue.

In terms of tools, I do and I don't. If you look at the authority of the managing director of the IMF, I have very limited authority. When I'm in -- when other countries are in need of support and financial support, and when we put together a program, then the Fund has the leverage. Then the Fund can -- with the expertise, the benchmarking, the previous programs that it has put together, the Fund is in a -- in a position to say you have to do this, you shouldn't do that, please don't do it, in a very forceful or very nice way. But at the end of the day, it boils down to are the conditions of the programs satisfactory so that the Fund can actually chip in and participate in the financing of that country.

But absent situation like that -- and the less we have, the better, although from a financial point of view, from the Fund perspective, the more crises, the more lending instruments, the better financing we have -- but for the world at large, the less of those we have, the better.

So if you take those cases out, what is my authority? It's based on the quality of the work produced by the staff. It's based on our reputation, it's based on our independence, it's based on our integrity, so that when the Fund says the exchange rate over there --hmm, that doesn't help; if it was moving a little bit in that direction, it would have spillover effect of such or such nature, or the banking system is not sufficiently capitalized, and if it was, then there would be a lot more confidence in the system as a whole so that people would not save as much; they would consume a bit more, and that would generate growth -- that's where the authority of the Fund lies, and that my duty, as I see it, is to actually protect that so that when the Fund draws a judgment or makes a recommendation, it is heard because it is fair, because it is legitimate, because it is credible.

GLOCER: Excellent. A very good place to stop.

I'd like you all to join me in thanking Christine Lagarde. (Applause.)







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