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 131.

    Reduce government spending on the wasted billions consumed by the NHS, Welfare, Education and Defence. Why does it now take a degree to do jobs which people used to be trained into? Teachers should do training out of term time. Why do people on benefits expect to keep having kids at everyone elses cost. Low expectations of contribution and high expectations of handouts = Cheers NuLab

  • rate this

    Comment number 130.

    Please, everyone take a look at ' bailing-out-the-banks-part-one-the-simple-answer/'

    See Post 50 from averagejoe for the link. Golemiv is fascinating as are all the comments. An insightful analysis.

    I like Steve Keen's proposal as well. What are the drawbacks though?

  • rate this

    Comment number 129.

    While the Figuren that Top 10% pay and make up 30% of all revenue for HMRC when those Top 10% Are earning Many millions and tens of millions the tory arguement is flawed.

    If average wages Are 25k the Top 10% Are always going to have make up Major differential

    perhaps If averages were more like 50k then bottom could pay a fairer contribution to tax take

  • rate this

    Comment number 128.


    Problem is, that to wind down the increasing costs afflicting individuals, families & businesses, its essential for Govt to cut spend & reduce some taxes to create jobs. That will require others individs, who have sufficient inc, to pay more tax for a while. Its almost impossible to get them to do this.

    Instead, the Govt spend will grow & taxes for all will increase ...

  • rate this

    Comment number 127.

    When will these people talk about the massive financial elephant in the room, i.e. the 100s of trillions of dollars, held by the Rothschild banking family?...ill gotten gains I might add judging by this family's history

  • rate this

    Comment number 126.

    re#87 prudeboy

    Nope. The lunatics were the last lot.

    Now, it's the monkeys in charge of the zoo!

  • rate this

    Comment number 125.

    On a more local subject, the increases in energy bills today are adding to GO's woes as his Benefits bill is about to grow. Again.

    I wonder what view Lagarde would have if GO said he was reducing the VAT levied on energy bills (despite EU rules requiring it) on the basis that growth in & a healthy UK economy is essential for the EU & world economy?

  • rate this

    Comment number 124.

    120.whatwouldJdo - "capitalism in the modern era is nothing but the biggest pyramid scheme ever!......"

    Right & wrong at the same time - there's always been alarge element of it being a pyryamid scheme, that scheme has just got larger with every generation that has passed.

    At least the early stock market focused on solid, unspectacular, reliable dividends not ever rising share price.

  • rate this

    Comment number 123.

    If this was a football match by now the crowd would be singing 'you don't know what you're doing', & 'you're getting sacked in the morning' at Legarde & her ilk. They cannot 'solve' the problem in Europe, & there isn't going to be any 'recovery' because the EU & the EURO are the problem. The solution is a referendum on the EU, & when Europe votes 'no' the EU is over, and the recovery can begin.

  • rate this

    Comment number 122.

    Growth in and of itself is meaningless. If I wash your car and you mow my lawn we have a simple agreement. If we pay each other the same amount, the economy has "grown", but the net effect is that we are both poorer since both of us pay tax on our newfound income.

  • rate this

    Comment number 121.

    Economists and their crazy obsession with growth - is what has helped bring this impossible situation of unpayable government and banking indebtedness. Outlook is now unbelievably grim. The only health remaining is in the business world, which is managed so much better and responsibly than governments and banks.

  • rate this

    Comment number 120.

    capitalism in the modern era is nothing but the biggest pyramid scheme ever! The wealth of the world hasn't simply vanished, it just that the ones ontop of the pyramid be it corprations or individuals have most of the money and are not using it. re-distribution of wealth is whats needed, goverments need to grow the balls to make it happen, or else revolution! and that wont work well for the elite!

  • rate this

    Comment number 119.

    116 I tried sarcasm .. we need players who pitch .. put themselves on the line .. every one can better themselves .. but most tend to just wallow and blame others for trying .. envy success .. equally such enormous number of people who only value their lives in terms of money ..

    haha .. thanks guys .. this is far better than FB .. cerebral .. good night

  • rate this

    Comment number 118.

    I don't like quoting numbers but 97% of Chinese work versus 64% of UK males of working age and 63% of US citizens of working age. And those Chinese earning 50p per day (for up to 16 hours per day) are the lucky ones compared to those living in the country.

    That's the problem for the UK, US and the PIIGS. And the answer is to compete with them and not borrow and print.

  • rate this

    Comment number 117.

    114 its not about limits at all .. Bonnington .. when asked why do you climb mountains .. answer,because there are there .. communism tried limits .. do we really want limits .. we want to be the best we can be .. everyone .. and whilst we cannot all be billionnaires .. we can dream, strive to be the best we can .. as a father .. nurse teacher .. we need that .. and that needs to be recognised .

  • rate this

    Comment number 116.

    #115. steve says

    " we don't need experts/thinkers/ experience/ dialogue/compromise/discussion"

    Hey you are right. - Let's just carry on as we are.
    Things aren't that bad are they?

    And the unwritten lesson for us all. - It's going to get worse.

    Why should it get better?
    Banking is evolving all the time.
    Finding other ways to extract wealth from others.
    Even when they fail, other bankers win.

  • rate this

    Comment number 115.

    113 lifes so simple .. we don't need experts/thinkers/ experience/ dialogue/compromise/discussion // hey just try getting a few of your friends to agree on chinese or indian on a friday .. haha.. and as for skiing .. don't go to bretton Woods unless you snow plough

  • rate this

    Comment number 114.

    Agreed. On this basis, let's make £1bn enough
    They'll continue doing what they want to remain motivated and they'll be rich beyond belief. And if not, they can go and live on their island and let someone else run their business.
    While we're at it, there also needs to be a cap on corporate assets. Apple having $100bn in the bank is sick.

  • rate this

    Comment number 113.

    The IMF and Bank of International Settlements are not fit for purpose.
    Haven't been for some time.
    They have been usurped. Far from promoting world trade they merely promote money lenders.

    Not what the Bretton Woods gathering intended.

    So why hasn't there been any corrective action?

    Simply because the bankers are happy to carry on.
    Simply daft.

    We need another Bretton Woods. And quickly.

  • rate this

    Comment number 112.

    111 its not about limits .. thats not what motivates .. its feeding on success .. power .. being the best .. and as for Z .. it just happened then .. right !!! .. so thats why .. all you need is Harvard .. Oxford .. cambridge .. and getting there doesn't take effort .. drive .. ambition ..


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