In a world of constant turmoil and change for both economic managers and political leaders, Christine Lagarde stands out as a symbol of calm and stability. Earlier this year she was approved unanimously to take on a second five year term after her first tenure expired in July.
She came in after a period of damaging instability for the Fund that saw her predecessor Dominique Strauss-Kahn resign in 2011 after four years following allegations of sexual assault and Rodrigo Rato step down two years early in 2007 for personal reasons.
So what does she regard as the biggest successes during her first term in office, and what does she hope to achieve during her second term? “I think during my first five years we have consolidated the [IMF] financially, we are much more solid than we were with resources that have been increased significantly,” she says, in an exclusive interview with Emerging Markets.
“I think it is also more representative of the international community and as a result better accepted. What I hope we can achieve in the next five years is certainly building from that strength. I have the ambition to continue working on issues such as inequality, climate change, gender, corruption, the input of technology and its impact on the economy.”
The state of the economy has been the primary issue at the annual meetings after the IMF issued a decidedly gloomy World Economic Outlook that forecast growth of close to 3% this year, and 3.4% next.
She says that zero or negative interest rates are “transforming the paradigm in which banks are operating. Monetary policy “is being stretched thin,” she warns.
“If [this situation] lasts for a long time it is going to question the current business model not only of banks but also of insurance companies and pension funds. This is a very substantial issue.”
BANKING PROBLEMS
She stresses the need for banking problems in Europe especially to be “managed” effectively, urging a more aggressive approach to dealing with European banking problems, which she says have “systemic” implications in one case.
“A lot of good things have been done in the financial sector in terms of improved regulatory environment, improved supervision, better co-operation between regulators and supervisors,” Lagarde notes.
“When we look at the banks there is clearly a stronger capital structure and more buffers. We have living wills in place and we have in many instances bailing-in mechanisms that have been framed. Those are the positives since the global financial crisis.”
But, she says, “with interest rates at the zero lower bound or less than zero lower bound [that] is clearly transforming the paradigm in which banks are operating.” The second factor which has changed is the development of the financial non-banking sector or shadow banking sector.
There are particular concerns in Europe, she notes. “Without disclosing anything, market trepidation around one Italian Bank, one German bank and questions around some of the more southern European countries’ banking systems is clear evidence of that.
“This is not to say that all banks are in a difficult situation in Europe but some of them really need to be addressed.
“These institutions need to be managed because one of [them] is of systemic importance, and it is a very large institution — a complex one too. I think the authorities are aware that measures have to be taken. They are disposing of certain assets and considering disposing of further assets and strengthening the structure of the bank [concerned].”
The “big difference between the US and Europe,” says Lagarde, “is that the US took very abrupt and heavy duty measures to fix the financial sector, to fix the banks back in 2009 and to deal with the non-performing loans and the lack of capital.”
US authorities “went heavy” on reform “whereas the Europeans did not do that and did not deal with non-performing loans as promptly as the US and did not take [such] hard line measures. The financial sector, which was the big weakness of the financial crisis, was addressed head on and very promptly by US authorities whereas it was not the case in Europe. I think the Europeans are dragging things.”
EUROPE OVERTAKES U.S.
On overall economic performance, however, there are positive indications, Lagarde observes. She strikes an optimistic note on economic growth prospects in the euro area.
“In our forecast for 2016 the US economy is growing at 1.6% whereas the euro area is forecast to grow at 1.7%. That goes a bit unnoticed because we usually assume that the US economy grows at least one percentage point higher than other advanced economies but in the case of 2016 this is certainly not. The US has slowed down quite significantly.”
On the global economy, Lagarde notes that “the world is in an environment where everything that should be high is low — growth, inflation, interest rates and productivity. If we had more growth there would be more space for fiscal policy, debt reduction and reduction of inequality. Low growth is making all these things much more difficult.
“The urgency is for policymakers to actually ‘get on with it’ and combine urgently the three policy [tools] that they have available — which are monetary, fiscal and structural reforms.
“My hope is that they would leave this week of annual meetings not thinking that we need global fiscal stimulus, as we did back in 2009 but I would like them to go away thinking ‘there’s something that I haven’t done that I could do. Those who have been talking about structural reforms should not only talk about it but actually do it. If we just drive on, it will be just more difficult to extract ourselves from what I have called the ‘new mediocre’.”
BREXIT UNCERTAINTY
On globalisation, Ms Lagarde suggests that “what we are seeing at the moment is a reversal” of the process. “It is reversing the relatively free and unencumbered flow of goods and services on the basis of existing or international trade arrangements. There are populist voices around in various countries, and not just in the United States, calling for withdrawing behind borders, limiting the flow of goods and services[and] hindering the flow of people where people could move freely.
“I think it is less so on the movement of capital than it was because monetary policy is more predictable and has not moved violently, and we have not seen as much capital outflows and inflows than we had feared.”
How much damage is Brexit likely to do to Britain and to the EU and to other key global economies, Emerging Markets asks. “We think it will have negative effects, probably on both — more so on the UK than on the European Union,” Ms Lagarde responds.
“The time over which these effects will be produced is to be seen. It is good that there is now a triggering point in time when the Article 50 negotiations will start. When they will finish, we don’t know. What will happen in between is uncertain. There are any unknowns.”