The IMF and the world: Unsteady as she goes

Christine Lagarde Christine Lagarde was at the annual meeting of the IMF and World Bank in Tokyo

If you knew nothing of what had happened in the global economy over the past five years you would have found Christine Lagarde's opening press conference at the World Bank and IMF meetings in Tokyo on Thursday morning distinctly peculiar.

Why? Because she was saying some quite scary things about the outlook for the world, but she didn't sound like she wanted to raise the alarm. She sounded like it was pretty much business as usual.

A good example was financial sector reform, which came top of her list of policy priorities for governments. She said: "if you ask... supervisors around the world whether the financial sector is safer than it was five years ago, many will say: 'no, not yet'. And we tend to concur with that."

When you think about it, that's quite alarming. After all, five years ago the financial sector turned out to be less safe than it has been since at least the 1920s, maybe ever.

Since then, trillions of dollars have been ploughed into the global financial system and thousands of pages of new regulations and supervisory requirements have been drawn up to make the financial system stronger.

But Madame Managing Director is saying that the Fund doesn't think we're any safer than we were five years ago. And nor, apparently, do many regulators.

Top priorities

Funnily enough, no-one in the room thought this judgement was worth exploring further in the question and answer session.

The many international journalists present seemed equally untroubled by her other three priorities, which were: governments establishing credible programmes to bring down some of the biggest sovereign debt piles we have ever seen; creating jobs for the 48 million plus unemployed in the advanced economies, many of which have seen joblessness rise higher, for longer, than anyone expected; and, finally, that old favourite, tackling global imbalances.

On this last point, Madame Lagarde said the massive current account surpluses and deficits that we saw in the lead-up to the crisis had receded lately, but that was only because of the "conjunctural state of things".

In other words, deficits and surpluses had gone down, but mainly because people in the big deficit countries had less money now to buy stuff from abroad and the big surplus countries are having to pay a lot for their commodity imports.

Imbalances have probably also been helped by the drying up of global trade flows in the past few months, due to worries about the eurozone and the US economy, which could end up hitting the world's banks. These are not very encouraging reasons.

When growth picks up, the managing director said, "imbalances are likely to widen again".

This, too, might be considered worrying. After all, hasn't Sir Mervyn King told us, again and again, that those same high imbalances were the ultimate cause of the crisis and our economy won't properly recover until this big international problem is addressed?

Perhaps. But we didn't get any more on that subject either. None of the journalists present asked a question about it.

Big uncertainties

None of this is to berate the people sitting in that conference hall. If I were in Tokyo, I might not have asked about these things either; not because they aren't important, but because (a) we have heard them so many times before and (b) it is even less obvious than usual that these IMF and World Bank meetings can do anything about them.

Everyone agrees that the biggest short-term uncertainties hanging over the global economy are US fiscal policy and the crisis in the eurozone.

One month before a presidential election, neither the IMF nor anyone else can have much influence on US policy. And in discussing the rest of the world, US officials in Tokyo are likely to be somewhat distracted, at best.

What about Europe? Surely the IMF still has plenty to play for in Europe? Except, the limited influence the Fund might have had in the eurozone is in danger of ebbing away. True, the European Central Bank (ECB) has asked it to advise on any Spanish support programme going forward, but it is not expected to make a financial contribution to any future bailout.

If you're sitting in Spain - or Greece - the Fund's influence in Europe matters because its view on matters fiscal has now moved quite far from Germany, the European Commission and the ECB.

Stephanie Flanders on the IMF downgrading its estimate for global growth

As I have mentioned several times before, Fund officials have been privately lobbying for a slower pace of fiscal adjustment in the periphery countries for well over a year. But that came more fully into the open this week with the release of the chief economist's new research on the economic impact of fiscal austerity programmes since 2009. I reported on the UK implications of this research into the 'fiscal multiplier' for Radio 4 and BBC1 on 9 October.

Money-wise, the Fund has been a minority partner in eurozone bailout programmes to date. By and large, it has simply gone along with what the rest of the Troika wanted. If it is now to move to a more advisory role, some say that will embolden its officials to speak more openly about what they would call a more growth-friendly solution to the eurozone crisis, with more expansionary policies in the core countries and a slower pace of adjustment in Spain and the rest.

Others inside the Fund take exactly the opposite view: with less "skin in the game", they say, the Fund will have even less capacity to make its voice heard.

Here's what we do know: it is hard to envisage any long-term resolution to the eurozone crisis that does not include a moderate level of growth in the periphery economies, and the Fund now takes a rather different view on how to achieve that growth than the powers-that-be in Brussels or Frankfurt.

The IMF's latest World Economic Outlook has some of the same disconnect between scary content and hum-drum tone that we saw in Christine Lagarde's press conference. Nearly every growth forecast for this year and next was revised down, financial vulnerabilities were "even higher than in the spring" and the downside risks to the forecast were "much higher" as well.

Yet, for all that, Olivier Blanchard allowed himself to suggest, in the foreword, that the "worst might be behind us".

The world is still a scary place, but for the Fund - and for governments - scary is becoming all too normal. The more normal it seems, the less scope there may be for the IMF to make much of a difference.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 51.

    @47 Charles Jurcich

    Surely the fiscal multiplier is not a constant, making any simple re-calculation of the structural deficit potentially misleading.

  • rate this

    Comment number 50.
    Interesting article by David Malone, which helps to demostrate why Governments, Banks and the IMF will do everything to save the banks and financial system regardless of the cost to humanity.

  • rate this

    Comment number 49.

    There is only one real crisis - soveriegn debt from lazy European and N/American countries who will vote in 'borrow and spend' governments rather than work hard. Nothing that has been done fixes that so yes, I agree, nothing is better than five years ago.

  • rate this

    Comment number 48.

    Is this the same IMF who were totally oblivious to what was going on prior to the initial financial crisis and are constantly updating their forecasts as they are wrong every time.

    You might as well ask Mystic Meg.

  • rate this

    Comment number 47.

    45 WonderfulBBC
    Stephanie said:
    "I reported on the UK implications of this research into the 'fiscal multiplier' for Radio 4 and BBC1 on 9 October."

    I've heard about this elsewhere too. Essentially when economists underestimate fiscal multipliers, they are also overestimating structural deficits as the two are connected.

  • rate this

    Comment number 46.

    Amazing how IMF are not concerned about citizens in a society All that matters is that Banks get paid back

    Eventually we are going to have to have a Debt Amnesty and re-callibrate

    2008 the Winners were all the Bankers

    In a Debt Amnesty the Bankers are going to have to loose


  • rate this

    Comment number 45.

    wrt 24, Charles, precisely where does Stephanie's article tell us that .. the IMF... over estimated our structural deficit?
    Also, you allege that Brown n Balls created a small structural surplus in the run up to the crisis.
    I'd like to see the facts that prove both of these views.

    Presumably, this means you believe that all was well under Labour, and the Coalition are to blame for all our ills?

  • rate this

    Comment number 44.

    As I've told you before, you may as well toss a coin. You don't understand what is happening in the global economy at all. Not saying I do, but I am not being paid to guess (badly).

    I don't blame you, I just wish you would be honest and say "I don't have a clue, most of what I thought I knew has proven to be garbage".

  • rate this

    Comment number 43.

    Country debt levels get to high, due to eg. bailing out its banks (Ireland), etc. IMF strategy: Offer more debt, in return for selling off public owned infrastructure and cutbacks. Cutbacks reduce GDP and increase debt, corporations buy public infrast cheap and loan back=more debt. IMF offers more debt in return for more of the same= country asset stripped until bankrupt. Result: poverty

  • rate this

    Comment number 42.

    The IMF knew all this decades ago as we saw the same repeated in every developing country they got at.

    They simply thought they could get away with the same banker driven policies in developed nations too and have come to the conclusion that the lower orders are in a better position to complain. Loudly.

    So, they're backing down. Just a bit, mind. They still want the same. Don't be fooled.

  • rate this

    Comment number 41.

    Let's get back to the old "Barter System"?

  • rate this

    Comment number 40.

    The source of this crisis was always an insolvent financial system. As neatly set out in David Malones book. It created to much debt fuelling a property boom, and built a huge derivatives market on the back of this debt. It is imploding. All the QE, LTRO and bailouts, are to try and stop its collapse. But it will destroy the currencies in the process, and cause a huge depression.

  • rate this

    Comment number 39.

    rE #38 SRB: "Spanish GDP almost trebled in the eight years to 2008. Unless there is a good rationale for such a rapid rate of expansion, it’s difficult to see how further growth can be achieved quite so soon."

    Forget Spain, already following Cyprus', Greece's and Portugal's path.

    Look at Italy, which hasn't had an real growth since 1998, and would require 2 TRILLION euros to be bailed-out.

  • rate this

    Comment number 38.

    “it is hard to envisage any long-term resolution to the eurozone crisis that does not include a moderate level of growth in the periphery economies”

    Spanish GDP almost trebled in the eight years to 2008. Unless there is a good rationale for such a rapid rate of expansion, it’s difficult to see how further growth can be achieved quite so soon.

  • rate this

    Comment number 37.

    34 Lorentz
    "conveniently forgetting that it was Brown who was a key player in undermining the UK's fiscal position"

    Actually Stephanie's article tells us that only now are the IMF begining to recognise that they over estimated our structural deficit. Brown and Balls already new that - we clearly had a small structural surplus in the run up to the crisis.

  • rate this

    Comment number 36.

    What is really scary is the assumption that future growth is inevitable and that it will cure all our ills. In a finite world, eternal growth is far from inevitable and the sooner we accept this, the sooner we can start seriously exploring post-capitalist options. Vested interests offer little chance of that!

  • rate this

    Comment number 35.

    The financial sector has moved on a great deal since 5 year ago. The primary issue was bank lending; this has been improved, and with austerity economies are trimmer and leaner.

    It is only once economies recover that we deal with the debt burden, which largely remains unchanged. Government and banks will eventually be unleashed to increase spending and then economies will steady.

  • rate this

    Comment number 34.

    - conveniently forgetting that it was Brown who was a key player in undermining the UK's fiscal position, and removing banking legislation. The guy should be prosecuted along with his buddies for what he has done.

  • rate this

    Comment number 33.

    Who are the IMF? A private corporation who's sole interest is making money. In whose interest do they work? The banks. And who are their gullible customers? Countries with debt levels they cant service. And what do they offer to tackle this problem? More debt. The alternatives are default and print money. One hits the wealthy the other hits the people, as the wealty hold more investments.

  • rate this

    Comment number 32.

    All of the western economies in the world have all peaked and once you have peaked there is only one way to go!



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