Global Action For Global Recovery

Christine Lagarde Project Syndicate September 26, 2011

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Global Action for Global Recovery

WASHINGTON, DC "“ The global economy has entered a dangerous new phase. There is a path to sustained recovery, but it is narrowing. To navigate it, we need strong political will around the world "“ leadership over brinksmanship, cooperation over competition, and action over reaction.

One of the main problems today is too much debt in the global financial system "“ among sovereigns, banks, and households, and especially among the advanced economies. This is denting confidence and holding back spending, investment, and job creation. These countries face a weak and bumpy recovery, with unacceptably high unemployment. The eurozone debt crisis has worsened, and financial strains are rising. Political indecision in some quarters is making matters worse. Social tensions bubbling beneath the surface could well add fuel to the crisis of confidence.

In these circumstances, we need collective action for global recovery along four main policy lines: repair, reform, rebalancing, and rebuilding.

First, repair. Before doing anything else, we must relieve some of the balance-sheet pressures "“ on sovereigns, households, and banks "“ that risk smothering the recovery. Advanced countries need credible medium-term plans to stabilize and reduce public debt.

But consolidating too quickly can hurt the recovery and worsen job prospects. There is a solution. Credible measures that deliver and anchor savings in the medium term will help create space to accommodate growth today "“ by allowing a slower pace of consolidation. Of course, the precise path is different for each country, as some are under market pressure and have no choice, while others have more space.

It is also important to relieve pressure on household and banks. With respect to the United States, I welcome President Barack Obama's recent proposals to address growth and employment; actions like more aggressive principal-reduction programs or helping homeowners to take advantage of low-interest rates would also help. And, in Europe, the sovereigns must address firmly their financing problems through credible fiscal consolidation. In addition, to support growth, banks must have sufficient capital buffers.

The second issue is reform, with the financial sector a high priority. On the positive side, we have broad agreement on higher-quality capital and liquidity standards with appropriate phase-in arrangements. But substantial gaps remain and must be addressed through international cooperation in order to avoid regulatory arbitrage.

I would also include the social dimension under the reform banner "“ particularly the need to identify and nurture sources of growth capable of generating sufficient jobs. This is especially important for the young.

The third target of collective action, rebalancing, has two meanings. First, it means shifting demand back to the private sector when it is strong enough to carry the load. That hasn't happened yet.

Rebalancing also involves a global demand switch from external-deficit countries to those running large current-account surpluses. With lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery. But this rebalancing, too, has not happened sufficiently, and if the advanced economies succumb to recession, nobody will escape.

The fourth policy imperative is rebuilding. Many countries, including those with low income levels, need to rebuild their economic defenses "“ for example, by strengthening their budget positions "“ to protect themselves against future storms. This will also help to provide the space for growth-enhancing public investment and important social safety nets.

In these circumstances, the International Monetary Fund "“ with its 187 member countries "“ is uniquely positioned to foster collective action. Our policy advice can help shine a light on the pressing issues of the day "“ growth, core vulnerabilities, and interconnectedness. Our lending can provide breathing space for countries in difficulty. And, looking beyond the crisis horizon, the IMF can also help construct a safer and more stable international financial system.

This is no time for half-measures or muddling through. If we seize the moment, we can navigate our way out of this crisis and restore strong, sustainable, and balanced global growth. But we need to act quickly "“ and together.

Christine Lagarde is Managing Director of the International Monetary Fund.

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Username Password New registration Forgotten password ReginaldVG 10:21 25 Sep 11

It seems Madam Lagarde's hopes for a focused, prompt move by US politicians will soon be dashed; sanity rarely infects Capitol Hill and never infects the post-Civil War Republican party. The European Union seems no more unified although the divisions may be less bitter. Nonetheless, one cannot fail to hope her prescription will be filled.

Zsolt 02:14 26 Sep 11

I really like the first paragraph of the article, as this is a very clear, bold and almost visionary statement from someone who is still in active leading position in the financial or political world today:

"...The global economy has entered a dangerous new phase. There is a path to sustained recovery, but it is narrowing. To navigate it, we need strong political will around the world – leadership over brinksmanship, cooperation over competition, and action over reaction..."

But I still think that the 4 pronged recovery plan she is suggesting is still missing a crucial element: understanding. Why would present day leaders, or even the voting public choose cooperation over competition, action over reaction, etc?

What would be their motivation?

The first step in any recovery process has to be the understanding that the reason we need to change our present practices, our present attitude is that by changing we can arrive to something better, or if we do not make the change we will arrive to something much worse. Human beings are acting out of motivation either to run towards something better, or to escape something worse.

We are extremely adaptive and ingenious creatures, as soon as we understand why we have to act, we would find the solutions immediately as we did before during our history.

So it all has to start with the examination and understading that we have developed into this global, integral system, which brought us into such a close, interconnected and interdependent network, that in these new conditions all our previous methods and practices have become destructive, and we have to adjust ourselves to work towards the common good, as only a healthy, balanced system can yield individual wealth and happiness. Today we can prove this integral system with scientific studies, we have the devices and the material to open it up to every layer in society.

When people understand that their every day bread and water depends on every other element and the overall balance in the system, they will willingly change their attitude to the new, required global attitude.

Withut this foundation it does not matter what other steps we make, it cannot be successful, or will lead to the same colossal mistakes we made before.

AUTHOR INFO Christine Lagarde Christine Lagarde is Managing Director of the International Monetary Fund. MOST READ MOST RECOMMENDED MOST COMMENTED The Great Bank Robbery Nassim Nicholas Taleb and Mark Spitznagel The Price of 9/11 Joseph E. Stiglitz The Economics of Happiness Jeffrey D. Sachs Europe on the Verge of a Political Breakdown Barry Eichengreen How to Prevent a Depression Nouriel Roubini A New World Architecture George Soros Did the Poor Cause the Crisis? Simon Johnson No Time for a Trade War Joseph E. Stiglitz The Second Great Contraction Kenneth Rogoff America's Political Class Struggle Jeffrey D. Sachs Divided We Fall Gordon Brown Europe on the Verge of a Political Breakdown Barry Eichengreen Thinking the Unthinkable in Europe George Soros How to Prevent a Depression Nouriel Roubini The Crisis of Fiscal Imagination Dani Rodrik ADVERTISEMENT PROJECT SYNDICATE

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What would be their motivation?

We are extremely adaptive and ingenious creatures, as soon as we understand why we have to act, we would find the solutions immediately as we did before during our history.

Withut this foundation it does not matter what other steps we make, it cannot be successful, or will lead to the same colossal mistakes we made before.

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Global Action For Global Recovery

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