Christine Lagarde, managing director of the International Monetary Fund (IMF), sees no alternative to the strict austerity policies being imposed on many peripheral European countries, says the double dip recessions in Italy and Ireland just announced come as no surprise, and notes that IMF reforms will shift 6% of current quotas to dynamic emerging and developing countries. Lagarde’s comments came in an exclusive interview with Knowledge@Wharton and media partner ParisTech Review late last week, as BRIC countries demanded more voting power in return for the larger financial contributions being requested by the IMF. “Clearly, the BRICs will be among the recipients of these additional quotas,” which cover voting power and financial contributions, Lagarde says. Additionally, the IMF will release a new model for assessing the world’s exchange rates later this year, and she confirmed that the fund will probably raise U.S. GDP growth estimates for 2012 “a little bit,” up from the current 1.8%, at the IMF World Bank spring meeting starting April 16.
After a distinguished legal and consulting career, Lagarde was named France’s Minister for Foreign Trade and then became the first woman to hold the post of Finance and Economy Minister of a G-7 country.Forbes ranks her as the 9th most powerful woman in the world (right behind Michelle Obama) and the 39th most powerful person on the combined men’s and women’s list.
An edited transcript of the interview appears below.
Knowledge@Wharton: We learned in the last week that Italy and Ireland are both returning to recession. Do you see any fallout from that? Is it a sign that the world outlook, which was improving, is getting shaky again?
Christine Lagarde: As part of this fragile recovery that we have been seeing since January, we have always considered that Europe and the euro zone in particular would go through a mild recession. The countries that are driving the recession at the moment are clearly countries like Ireland, Greece, Portugal and Italy. So this doesn’t come as a surprise. It’s part of a process that we had anticipated and were forecasting for 2012.
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Knowledge@Wharton: Related to that, austerity has been one of the chief policy levers Europe has been using to deal with the crisis. Do you think European leaders have focused on austerity too much and gone too far with it? Should a better balance be struck between austerity and stimulus?
Lagarde: If everybody goes at the same pace with austerity measures, it puts the whole region at risk. What we have advocated consistently now for at least the last six months is that there should be a proper balance within the zone, particularly within the advanced economies. We also need a proper balance between the austerity measures that are necessary and the growth-facilitating measures. So, obviously, it’s not a one-size-fits-all.
Some countries can afford to relax a little bit the austerity policy that they had embarked on. Others cannot relax the austerity measures. For instance, Greece is one country that certainly should not relax its measures. Italy is another one.
Knowledge@Wharton: You’re giving a little latitude to Spain.
Lagarde: I’m not really thinking in terms of latitude. Some countries have to be very, very brutal, in terms of reducing their deficit and bringing sanity to their public finances. The periphery of the core of the euro zone is clearly at stake in that regard. Then you have countries that are pretty much balanced and where you can just let the automatic stabilizers play out. They can let increased expenditures in the welfare system come into play and not compensate [for] the reduced revenues that result from their economic situation. Still other countries — not many, unfortunately — can slow the pace, relax, and let the recovery pick up. A couple of large European countries could probably look at that [approach].
Knowledge@Wharton: Are you saying that you’re in agreement with the way that balances at the moment?
Lagarde: In terms of diagnosis, I agree that austerity should not be the exclusive focus of attention. It should not be the underlying general theme across the region in terms of economic policy. I also agree that growth is a key factor to try to not only kickstart, but maintain the recovery that is beginning to take hold in some countries. Otherwise, it makes the whole exercise extremely difficult.
Knowledge@Wharton: Can you have too much austerity in the short term rather than it being spread out more evenly towards the medium and long term?
Lagarde: It depends on the situation. There are some countries in which sharp adjustment is needed in order to be able to bounce back from that situation.
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Knowledge@Wharton: You have said that Europe needs deeper integration and bigger firewalls.
Lagarde: I said that when nobody was yet at the table. And now…
Knowledge@Wharton: They’re there.
Lagarde: Almost.
Knowledge@Wharton: The question is, what does deeper integration look like? What would be some medium- and long-term goals for integration?
Lagarde: Deep integration is a recent development. It was much needed in order to consolidate the currency zone. We’ve seen things recently that were totally unexpected and almost unimaginable only 18 months ago. What is important for better integration is a combination of solid fiscal coordination with real discipline imposed upon the partners, including sanctions that are not only applicable, but are also applied if the rules are violated.
Knowledge@Wharton: Would that give the GDP ratios that need to be met in terms of deficits and overall debts?
Lagarde: Yes. They have added to what was already planned in the growth and stability pact but at that stage with very little by way of teeth and measures to make sure that it was implemented. What they’ve added as well is a preventive aspect to the pact, where they anticipate and can actually be helpful to members that are going down a trend that is going to lead them to violate the rules, [such as] the 3% deficit and the 60% debt-to-GDP ratio. So that’s a good thing.