In terms of better integration, one institution has played a much better and very significant role lately — the European Central Bank. Number one, [it has] reduced the level of collateral to make sure that it’s of better service to the members. And number two, the ECB has provided much more liquidity to the banks, so that they can not only finance themselves, but also provide credit to the markets and avoid the negative deleveraging that nobody wants.
The ultimate integration that would be desirable would be to have some sort of joint liability. That could come from something like euro bonds or a joint instrument that would pool the countries together in terms of their borrowing. Now, they’re not there yet. I think some of the member states will have to improve their situation and their competitiveness. They will have to catch up with the delays they suffered from, that they inflicted upon themselves, by doing the wrong thing or simply by not doing anything. Once that has happened, then one might hope that this sort of fiscal integration and joint liability would be in place.
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Knowledge@Wharton: There has been a lot of resistance to that.
Lagarde: Yes, absolutely.
Knowledge@Wharton: The idea of Euro bonds raises hackles in a lot of quarters. But your point is that if the euro zone members can cooperate on these measures, that would help.
Lagarde: Even on that front, there has been huge progress. If you look back 18 months ago, to the time when [Luxembourg Prime Minister Jean-Claude] Juncker and [Italian finance minister Giulio] Tremonti proposed issuing Euro bonds in a joint paper in the Financial Times, at that time German Chancellor Angela Merkel was absolutely dead set against it. Now her position has evolved. She — or her minister of finance — is saying, “Well, not now, but in the future, why not?” And the five wise economists of Germany have themselves put together a proposal that could go a long way toward bringing some joint responsibility among the members.
Knowledge@Wharton: That’s a big shift.
Lagarde: Yes, it’s a huge shift.
Knowledge@Wharton: Is there a role for the IMF in helping increased integration move forward? Or is this something the Europeans do on their own?
Lagarde: It has to belong to them. It has to be theirs. They should have ownership of all of that. All we can do is identify, demonstrate with the team of great experts, that we have in this institution, the benefits of doing so and the drawbacks of not doing it.
Knowledge@Wharton: And perhaps contributing to the stability fund that might allow integration to go more smoothly?
Lagarde: Well, we will be part of the firewall at some stage. And the firewall is not just going to be about Europe. They are all going to have to build their firewall, and I hope that we will be seeing developments very shortly. [On Friday, as this interview was being conducted, finance ministers from the euro zone finally agreed to increase the size of the firewall to 700 billion euros.]
The IMF is a multilateral institution. We’ll have to develop more firepower in order to be able to assist not only the euro zone but also any country outside the euro zone that could be a collateral victim of any resurgence of the crisis.
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Knowledge@Wharton: Is it possible in the medium and long term for the euro zone to keep the common currency without more political integration?
Lagarde: It’s difficult to read into the future. But what we can say is that it would certainly strengthen and make the currency zone much more sustainable and safe. I don’t know whether to call it political integration, but certainly we need much deeper economic and fiscal integration.
Knowledge@Wharton: In Spain, youth unemployment is about 50%. You’ve spoken about this, and it’s very important to you. Are there any specific policies that can help to redress this situation, apart from those that would stimulate the economy in general and help it recover?
Lagarde: We all wish there were some magician’s wand we could wave to create jobs. At the end of the day, that is what everybody wants to do. It’s not just about growth in and of itself … it’s about jobs. It’s about keeping people off the street. It’s making sure that they have a chance to express themselves on the job market and have dignity through work. But apart from stimulating growth, apart from an economic situation that warrants the creation of jobs, there is no magical recipe for that. But it’s a key issue.
We keep talking about growth. We have seen, in the past, occasions where growth was actually generated but without jobs. It was growth exclusively directed at a very small, elite portion of society. When you think of a country like Spain, and many other countries as well, it has to be growth that actually creates jobs. It should be growth that is sufficiently inclusive that it actually helps keep the chemistry of society together.
Knowledge@Wharton: It can’t just be growth in one sector, such as the finance sector, for example.
Lagarde: Absolutely. Yes.
Knowledge@Wharton: How do you see the role of the IMF evolving in dealing with global economic issues during the next few years?
Lagarde: My constant concern and ambition is to make sure that the IMF continues to be relevant to its membership. For the IMF to be relevant, it has to be representative of the membership and therefore credible from an institutional point of view, and it has to be relevant from a quality point of view. We need to both represent our membership, and we need to provide the quality of advice, the quality of service, the quality of technical assistance, the quality of surveillance, that will make us constantly relevant. It’s a combination of quality and credibility that will continue to make us relevant.
The role of the IMF is evolving, and we have to be sufficiently agile so that we actually pick up the [lessons] from the crisis. If I could give an example, the traditional exercise of the IMF was to conduct what we call the Article Four consultation. These were bilateral exercises that consisted of going under the skin of a country and finding out whether the economic policies were the right mix and whether we could recommend better solutions and options. Now, on the occasion of the financial crisis, we went much further into multilateral surveillance and into studying the spillover effects. The financial crisis may have hit a particular country, but it also affects many other countries. How did that contagion occur? How fast did it contaminate the rest? Why was it so fast through those particular segments?