Monday, January 19, 2015

Christine Lagarde Speech to the Counil on Foreign Relations

On January 15th IMF Managing Director Christine Lagarde gave a speech to the Council on Foreign Relations. You can view the speech here. In addition here is a link to the text of the speech. This speech is absolutely full of interesting comments and a hint about where things stand on the 2010 IMF reforms. Below are some selected quotes from the speech. Below that we will add some concluding comments about what we think are some key takeaways.

"Good teamwork and strong leadership will be needed this year. The latest update of our World Economic Outlook – with all the specific numbers – will be formally presented next week. But I can already say this: despite the boost from cheaper oil and stronger U.S. growth, we see the global recovery continuing to face a very strong headwind."

. . . . 

"The obvious question is this: should lower oil prices and a stronger recovery in the United States make us more upbeat about the prospects for the global economy? The answer is most likely “No,” since there are still powerful factors that weigh on the downside."

"Certainly, the drop in oil prices is a welcome shot in the arm for the global economy. Cheaper oil increases consumers’ purchasing power and private demand in oil-importing countries. Depending on how long oil prices will remain at low levels, this could provide a positive contribution to global growth for some time."

. . . . 

"So what is the catch? The oil price and U.S. growth are not a cure for deep-seated weaknesses elsewhere. Too many countries are still weighed down by the legacies of the financial crisis, including high debt and high unemployment. Too many companies and households keep cutting back on investment and consumption today because they are concerned about low growth in the future."

Overall, we believe that global growth is still too low, too brittle, and too lopsided. Moreover, there are significant risks to the recovery. What are these? 
1- First, the asynchronous normalization (central banks going different directions) of monetary policies in advanced economies. There has been a lot of talk about this, but this year we should expect it to actually begin. The U.S. could see its first rise in short-term interest rates since 2006 – an important moment.
2- Second, emerging and developing economies could face a triple hit of a strengthening U.S dollar, higher global interest rates, and more volatile capital flows.
3- Third, there is a risk that the Euro Area and Japan could remain stuck in a world of low growth and low inflation for a prolonged period.
4- Fourth, there are increased geopolitical risks. In Ukraine, for example, increased international support to complement IMF support is crucial. At the same time, there is a palpable sense that the forces of intolerance and fragmentation are gaining strength.

Ms. Lagarde goes on to offer ideas on how to address these risks. Please read the full text of the speech to see those. In her concluding remarks she says this:

"The new multilateralism also requires institutions that are efficient, credible, and representative of a changing global economy. This is why the international community agreed to reform the IMF to increase the representation of emerging market countries. The 2010 quota and governance reforms would also help sustain the Fund’s financial firepower to meet the challenges ahead.
The IMF’s membership had called on the United States to ratify the 2010 reforms by the end of last year, which did not happen. As I have spoken much about leadership today, I cannot but express my profound disappointment in the political powers who have so far failed to grasp the benefits of the reform both for their own country and for the world at large. We have seen better from the United States over the last 70 years.
We will now be working on interim solutions to address some of the concerns of our other 187 member countries. But let me be clear: given the challenges that 2015 and the following years will bring, there is no alternative to completing the 2010 reforms and we continue to call on Congress to approve them without delay."
My added comments:

In this speech Ms. Lagarde lists four risks the global economy faces in 2015. We have covered all those risks extensively here on the blog. The fact that she lists them in this important speech means they are real risks and should be taken seriously.

In her conclusion, she once again expresses "profound disappointment" over the failure of the US Congress to approve the 2010 IMF reforms that would boost the "financial firepower" of the IMF and give the BRICS nations more voting power. Her comments on this are very interesting. Just last month the IMF issued a statement that in January 2015 they would begin meetings to discuss "alternative options" on how to implement the IMF reforms.

Please note the wording she uses in this speech regarding that:

"We will now be working on interim solutions to address some of the concerns of our other 187 member countries. But let me be clear: given the challenges that 2015 and the following years will bring, there is no alternative to completing the 2010 reforms . . ."

Yet another "deadline" passed without the reforms being passed. In these comments she says they are "working on interim solutions to address some of the concerns" of the other 187 member nations. Then she adds "there is no alternative to completing the 2010 reforms" and again calls on Congress to pass them.

Some fair questions here might be: 

Does this mean that she is telling the 187 member nations that the IMF will do something to try and appease them, but that the reforms will not be implemented unless passed by the US Congress? Is she hinting that the IMF will NOT try to bypass the US Congress on this issue?  If so, how will the BRICS nations take that if Congress does not act

Having covered this now for over a year, here is what we have seen. Continued expressions of frustration and disappointment by the IMF and the BRICS nations over this issue. This led to the setting of "deadlines" for the US to pass the reforms. The deadlines pass. More disappointment and frustration are expressed and then a new "deadline" is set. Nothing significant actually happens.

At some point, endless "deadlines" lose all meaning and credibility. For now it appears that the US Congress is in full control of this situation and that despite frustration and disappointment, all we will see is more meetings and more future deadlines set. We will have to see what Ms. Lagarde means by "interim solutions to address some of the concerns of the other 187 member nations" to see if any real significant change takes place.

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