There seems to be some kind of revival sweeping over Europe these days, with both economists, regulators and politicians suddenly starting to realize what so many have pointing out for several years: The global crisis is actually just getting started, the stimulus and the austerity measures are just not working and the financial markets has ditched most of what little confidence they once had in governmental and institutional leaders’ ability to solve basically systemic flaws in our economic system. Today, as the markets keeps tumbling, newly appointed IMF-boss, Christine Lagarde, is telling us that a “crisis of confidence” have aggravated the situation.
“The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009.”
“It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle,” Mrs. Lagarde says in the interview with Der SPIEGEL. But when it comes to concrete solutions, she’s just as vague as any other politician.
The journalists, Marc Hujer and Christian Reiermann, from Der Spiegel asks all the right questions.
But Mrs. Lagarde is an experienced politician, and her answers are exactly as precise or foggy as they need to be from the IMF point of view.
Here’s the first part of the interview:
SPIEGEL: Ms. Lagarde, the global economy is slowing, markets are volatile and banks have all but ceased lending each other money. Does the situation remind you of 2008 just before the investment bank Lehman Brothers collapsed?
Lagarde: Each moment in history is different from previous situations and it’s wrong to try to draw comparisons. At the International Monetary Fund, we see that there has been, particularly over the summer, a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken.
SPIEGEL: What does that circle look like?
Lagarde: It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle.
SPIEGEL: What should be done?
Lagarde: When we look at the European situation, there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks. Clearly, the two go together. The sovereign debt issue weighs on the confidence that market players have in European banks.
SPIEGEL: Don’t you think that your warning that €200 billion ($285 billion) might be missing in the balance sheets of European banks aggravates the situation of those banks?
Lagarde: In the course of our work on global financial stability, we are looking at the situation in Europe. We will publish the results of this work in a couple of weeks. More generally, we do see a need for recapitalization of European banks so they are strong enough to withstand the risks coming from sovereign borrowers and from weak growth. This is key to cutting the chains of contagion.
SPIEGEL: Is the world on the brink of a renewed recession?
Lagarde: We are in a situation where we can still avoid it. The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we’ll avoid the recession.
SPIEGEL: At the moment, however, exactly the opposite would appear to be happening. Many governments have introduced austerity packages in order to make up for the vast expenditures made during the crisis. Is that wrong?
Lagarde: I wouldn’t pass general judgement on that because it’s going to be country-specific. For some countries, the path is fine and should continue as is. For others, some of the measures that have been taken are so strong, given the current deficit situation, that they can accommodate some relaxation — especially if the economy weakens further, and provided there is a clear medium-term consolidation path.
SPIEGEL: Do you consider Germany to be one of those countries which could do more to stimulate the global economy?
Lagarde: In the course of our annual country checks, our experts recently visited Germany. Their conclusion was that, under the circumstances, the fiscal consolidation path adopted by Berlin was perfectly fine.
SPIEGEL: For now.
Lagarde: Of course these things always depend on circumstances. Given Germany’s heavy reliance on exports, if demand weakens so much that it really changes the equilibrium, then it would need to be revisited.
SPIEGEL: By, for example, stimulating domestic demand?
Lagarde: Domestic demand is good for both the German economy and for the other economies surrounding Germany. I do think that domestic demand in Germany has improved since the time when I floated this idea as finance minister in France.
SPIEGEL: Given the economic climate, do you not think it dangerous when countries pass laws mandating a balanced budget, as France is considering?
Lagarde: It’s clearly a signal to market players. It shows investors the seriousness of the government’s commitment to the principle of balanced finances. The general intention behind it is good.
SPIEGEL: Would you like to see the US implement such a “debt brake” rule?
Lagarde: Each country must find the best way to signal to the markets that they are serious about public finances. The IMF has a lot of experience and we would be very happy to give a hand to those countries that actually are in the process of implementing a debt brake.
SPIEGEL: Do you think the austerity measures recently agreed to in the US go far enough?
SPIEGEL: The commitment, after weeks of disagreement about the debt ceiling, to cut federal expenditures by at least $2.4 trillion over the next 10 years.
Lagarde: Such long-term commitments are a good principle because they credibly signal an intention to reduce the deficit and consolidate public finances on a more stable course, for example in health care spending. It can indicate that a country will reduce the deficit in the medium term and yet still have enough room in the short term to put in place measures that will actually stimulate growth and help create employment.
SPIEGEL: Does the US need a new stimulus package?
Lagarde: We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the US from its AAA status. As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.
Read part 2 of the interview with Chrisitine Lagarde at SPIEGEL Online:
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