IMF's Christine Lagarde urges action on fiscal cliff, euro crisis

International Monetary Fund (IMF) chief Christine Lagarde.

Christine Lagarde, managing director of the International Monetary Fund, is calling for more action from the U.S. and Europe today to fix the global economy, she said in an exclusive broadcast interview with Marketplace.

Lagarde's comments echoed a speech she gave at the Peterson Institute for International Economics in advance of IMF meetings in Japan next month. Lagarde praised central banks in the U.S. and Europe for the steps they've taken so far to help the worldwide economic recovery. But, she warned, that's not enough.

"[It's] urgent because we have at the moment what we call a momentum. In other words, good things have been done -- particularly by the central banks," she said. "They've created a little bit of calm and responded to the anxiety of the markets. So now is the time for the policy makers to do what they have to do."

Lagarde warned that American politicians need to act responsibly because overly aggressive spending cuts alongside ballooning debt could send the U.S. into another recession. She raised concerns over whether the global economy could handle another few months of U.S. inaction as it inches closer towards the fiscal cliff.

"If it had to, it would suffer," says Lagarde. "The bottom line: it means less growth, less jobs, and the economy of the United States is the largest economy in the world. It has links to the rest of the planet. So it would be bad for the U.S., but it would be bad for the global economy, as well."

And in Europe, she urged a "strong and effective banking union" to keep the euro together.

Listen to the full interview above or click on the transcript tab to read the full text transcript.

Christine Lagarde, managing director of the International Monetary Fund, is calling for more action from the U.S. and Europe today to fix the global economy, she said in an exclusive interview with Marketplace.

Lagarde's comments echoed a speech she gave at the Peterson Institute for International Economics in advance of IMF meetings in Japan next month. Lagarde praised central banks in the U.S. and Europe for the steps they've taken so far to help the worldwide economic recovery. But, she warned, that's not enough.


Kai Ryssdal: Madame Lagarde, welcome to the broadcast.

Christine Lagarde: Thank you very much, Kai.

Ryssdal: You spoke today in your speech about the need -- "the urgent need," in your words -- to fix the global economy. Why is this the moment for that speech? Do you sense some danger?

Lagarde: It's the moment for that speech bc the IMF [International Monetary Fund] is having its annual meeting in Tokyo in two weeks' time and generally we try to convey strong messages at the time when the membership gets together. It's urgent because we have, at the moment, what we call a momentum. In other words, good things have been done -- particularly by the central banks, not only in Europe but also in the United States and Japan. They've created a little bit of calm and responded to the anxiety of the markets. So, now is the time for the policy makers also to do what they have to do.

Ryssdal: What do you make of the fact that so far it's been the central bank doing things and the policy makers -- by which, of course, we mean the politicians -- doing not a whole lot?

Lagarde: (deep breath) Ah, well, that's a little bit unfair. Some politicians have done quite a bit; they just need to do more. Look at the Europeans, for instance. They have done quite a bit: they have built a line of defense, they have strengthened a collective budgetary policy, they have decided they were going to do the European Banking Union to supervise the bank on a much more consistent basis... So those are good things, but they just have to go further into the integration.

Now on the United States' front, it's a little bit different. Because clearly there is work to be done to avoid the fiscal cliff, to avoid the debt ceiling, and clearly that is not happening because of the political calendar that is keeping everybody busy doing something else.

Ryssdal: Let me ask you about the United States. In the U.S., we are having this fiscal cliff at the end of the year and, as you well know. the American Congress never does anything painful until its back is well up against the wall. Can the global economy deal with another 3, 4 months of American dithering, for want of a better word?

Lagarde: Well, if it had to, it would suffer. And it's a matter that would effect not just the U.S. economy but also the global economy, given the size of the United States. Everybody has heard about the fiscal cliff -- it's tax cuts that expire, it's spending that stops, it's sequestration of budgets and so on, so forth. The bottom line is it means less growth, less jobs.

The economy of the United States is the largest economy in the world; it has links to the rest of the planet. So it would be bad for the United States, but it would be bad for the global economy as well.

Ryssdal: Do you have confidence that Americans will figure this out?

Lagarde: I always have trust and confidence in the United States of America. For many, many years, that's been the case and I very, very much hope that they will live up to the expectations of the people. The people -- either in the U.S. or elsewhere -- are expecting the decision-makers, the policy-makers to act responsibly and in a coordinated fashion.

Ryssdal: Back to the Europeans. You said I was being a little bit unfair to the politicans, but to my count there have been 21, 22 policy summits in the past three or so years to try and get a handle on things. How much more time does the global economy have while the Europeans try to figure things out?

Lagarde: First of all, I think it's a good thing that they meet on a regular basis. Because if they want to be a coordinated, consolidated, better union, they have to meet together -- they have to talk, they have to make decisons, they have to argue their respective positions until they come to some sort of agreement. So I would not assume that matters will be resolved and there will be no meetings. I think there's likely to be more and more meetings. They'll have to meet more; it's going to be an unending process.

They've made progress on the European stability mechanism -- they decided that in March, it was implemented in the summer, but it will not be operating until October 8. So that's just to give you an example that things happen over time. It's not just a magic trick that will create the union institutions Europeans need.

Ryssdal: I appreciate that. But you using the phrase 'It's an unending process' does not inspire certainty in the global economy. And you spoke today about how damaging uncertainty can be.

Lagarde: Well, I'll give you an example. The European Central Bank has made the very important decision to actually buy sovereign bonds on the secondary market under certain conditions. That was expected, and that has been announced. And it really clearly, in my view, is a turning point in the current crisis. But, the Europeans still have to turn the corner together. It's a union of nations, a union of sovereigns, a union of economies that are joining forces in the face of the worse possible crisis that we've had since the Great Depression.

Ryssdal: Would you care to give an educated guess -- since this is sort of what you do for a living -- as to how much longer this might endure? Both the uncertainty here and the uncertainty in Europe and the trouble in Asia... it's all of a piece.

Lagarde: It's all of a piece in the sense that everybody has to participate in the process because we are all here, we are all global, we are all interconnected. I hope there will be more clarity once the [American] presidential election and the congressional elections are over, because there will be a much clearer indication of what the American representation want.

In Europe, it's more complicated. Because you have, in the Euro Zone alone, 17 countries, 17 congresses, 17 supreme courts. So you always have political calendars. You will always have elections coming up. So it's a question really of trying to align objectives. I think it has improved, frankly, in the last few weeks... but they have to keep up.

Ryssdal: I wonder, with all respect, if you are putting too much faith in politicians here and on the other side of the Atlantic.

Lagarde: At the end of the day, politicians represent their constituencies. But they have this broader and higher mandate to represent the country. If the economy of the country goes down, it is not helpful to the coutnry-at-large; [politicians] all want jobs to be created in their constituencies, want the economy to pick up, want growth to accellerate rather than decellerate. So, there should be vested interests in each and every one of them.

Ryssdal: When you have these conversations with your counterparts at other international organizations, and with international policy-makers, are they receptive to your remarks or do they say, 'Christine, come on, that's too hard?'

Lagarde: I think there's probably part of them that thinks but maybe doesn't say, 'Oh Christine, come on, that's just too hard. It's not my agenda.' But I also think there's part of them that understands the logic of what we're saying and the implications, the consequences of their decisions -- and the decisions of other foreign policy-makers, for them. It cuts both ways; it's a two-way street. When it doesn't go well in Europe, it has an impact on the United States; when it doesn't go well in the United States, it has an impact on the rest of the world. We're all linked in this.

Ryssdal: For those who are listening to this, who are still trying to figure out what exactly happened in this financial crisis, who do you blame?

Lagarde: First of all, I don't think the blame game is particularly helpful at the moment. But at the end of the day when we will comment on history, certainly there will be blame shared amongst many, many players -- the banks, the regulators, the supervisors, the auditors, the lawyers, just name it! (laughs) The ones that are least to blame are the taxpayers because very often they've been called upon to resolve the situation. So, a lot of blame, very, very braodly shared, and certainly lessons to learn from that crisis so as not to repeat it and much work to do in the meantime.

Ryssdal: Along those lines -- when does this end? How much more work? How many more years?

Lagarde: (laughs) Look, I think there will always be work. Because there is always a temptation to be excessive, to be abusive, and that's precisely the role of regulators and supervisors to try to stop that. To put in place a legal and regulatory system that is sufficient to protect people from their own mistakes, which are often caused by greed or fear. Those are the two big drivers.

Ryssdal: Christine Lagarde is the managing director of the International Monetary Fund.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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