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 111.

    Mark zuckerberg hardly took a risk! He was at Harvard!
    So how do you validate this business being speculatively valued at £60bn.
    Sure, Let the risk takers earn money and be rewarded, but put a ceiling on it. There isn't a need for a single individual to have more than £1bn assets.
    It's called the basic principals of a balance sheet. The global economic model needs balancing.

  • rate this

    Comment number 110.

    104 billionnaires are billionaires because they have taken risks .. invested .. created jobs .. new industries ,, Mark Zukkerberg ..stevee jobs .. turned round companies .. then the masses spend their (minimum wages) on products in there thousands .. which turns the world and creates demand and growth ..

  • rate this

    Comment number 109.

    Feedbackloop. Agree

    Turner's just said we need to do something unconventional.

    Stephanie Flander's just said we need to think out the box.

    Where's all the money gone???? It's somewhere...

    Grand cayman, Switzerland, Luxembourg etc

    Lets haul it out of their accounts and re-supply the economy.

    Capitalism needs a version 2 model. Version 1 doesn't work, it's a pyramid scheme.

  • rate this

    Comment number 108.

    107 harsh .. if you cut yourself you plaster it .. if it later turns nasty you seek further remedy .. atleast christine is out there doing it .. putting herself on the line .. last guy was with the maid .. haha

  • rate this

    Comment number 107.

    When was Christine Lagarde actually right about anything? After all she was part of the group of European Finance Ministers who imposed disastrous austerity on Greece!

    So her record in this area is one of abject failure.

  • rate this

    Comment number 106.

    things could be far worse .. you could be walking through a field with cows tomorrow .. and bam ... or riding a bike . old woman decides to turn left, they do that .. EMF will not on your mind ... Lesson from Japan .. do not cut public and private investment at same time .. confusian .. no one learns from history .. we are too optimistic for that

  • rate this

    Comment number 105.

    103 10etc you are right to focus on the question of surpluses but I suspect that things are not as simple as you think. Its true that if the rich take surpluses out of the economy and invest them in non productive assets you will eventually get a demand crisis. If the state does it you tend to get a production crisis. This discussion is absolutely central to the future of capitalism.

  • rate this

    Comment number 104.

    Following on from 103

    If you took the personal wealth of the top 20 billionaires (let them keep £1bn, they've earnt it!), and use this cash pile to re-fuel our economy, we'd all be sorted.

    Then make the utilise non-profit orgs!

  • rate this

    Comment number 103.

    When are we going to be brave enough to call out the fact that raw capitalism doesn't work. You cannot have a global monetary system that takes from the many and distributes to the few.
    We shouldn't be printing more money, we should be implementing a new global monetary law limiting how much individuals can hold. Ie: £1bn
    Beyond this, income/earning should be redistributed back into the economy.

  • rate this

    Comment number 102.

    99 Zeno
    "We manufacture nothing"

    Not exactly true Zeno, our total exports in 2011 was £493Bn of which £299Bn was goods rather than services.

  • rate this

    Comment number 101.

    We should first and foremost forget about magic wands like the Keynesien multipier. It was a different mindset; patriotism and fighting for your life during WW2 that ended the Great Depression and not Route 66 or the Hover Dam.

    We are always in a race with our competitors. But for 13 years the UK taxed our winners and rewarded our loosers and borrowed to bridge the gap.

  • rate this

    Comment number 100.


    Btw. Where is money for future bail-outs coming from?

    From the paper mills silly! Where else?

  • rate this

    Comment number 99.


    What are you talking about. We manufacture nothing, alot of our food is imported and if Asia sneezes our services industries will collapse, then we wont have enough money to compete for the very food we grow. Don't be so arrogant. We will be the last land to be affected, that is all. But we will not be immune. Read up on how the Great Depression affected us.

  • rate this

    Comment number 98.

    Jericoa: Happy days eh? Keep checking your health insurance though. You never know what lies rond the corner. Poison snakes and spiders, killer sharks, earth quakes, famine, heatwaves, poison trees and bushes,
    rank lager, wingeing pommies. etc. Go back to bed it is safer there. Nice to hear from you though

  • rate this

    Comment number 97.

    93 RR

    I think you will find that the Western lifestyle as it has been known for a long time is unsustainable - the current debt problem is just a symptom

    94 Jericoa

    Are you in Oz now then

    Watch out for the hard commodities tail, it will hit with the Asian slowdown and the over investment in production in Oz and elsewhere

    But a barbi on the beach sounds good

  • rate this

    Comment number 96.

    It annoyed me that Ms Lagaurde referred to "players". Does she think that this is just a game?
    Bill Gross has comented that a rise in interest rates would DESTROY bond holders or at least mutual bond holders. Does that explain the extraordinary low interest rates for 5 years?
    Sadly, a war (maybe involving East and West) is looming by the day due to these immoral people chasing a profit.

  • rate this

    Comment number 95.

    The latest bailout fund, to be financed by the 17, 'already stretched', members, is 500 billion. What good will that do? It will take two years to set the fund up and requires ratification. Moves to merge the eurozone finances is burdened with lack of equity and mistrust by the masses. The big reaper is on his way and there is no time left to stop him.

  • rate this

    Comment number 94.

    Good morning everyone, just woke up in Australia to another day of low sustainable population, food independence and ... therefore, potential for growth ( to eventually ruin it all).

    What's the problem Madam legarde?

    Oh yes silly me, I forgot most of the rest of the developed world is over populated, dependent on commodity imports of some kind in heavy debt and unable to grow. Wakey Wakey!!

  • rate this

    Comment number 93.


    Agenda 21, if it was ever implemented, would've been the triumph of the West in the face of a truly globalised economy. Its values and ideals would become the standard across the globe. The West treating the planet with respect and non-Western cultures as equals forms part of the Enlightenment project that makes us what we are today. What we will be witnessing soon is the End of the West.

  • rate this

    Comment number 92.

    It is good that China missed this meeting, I am so glad.

    And China with it's deep pockets should stay home and spread the wealth in China when they have it or lose it all to the EU and the US.


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