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New IMF Head Warns On U.S. Debt Negotiations, Global Stability

IMF director Christine Lagarde
Christine Lagarde, who earned high marks for her performance as the finance minister of France, has risen quickly to the top job at an institution often viewed as a last resort for states in economic distress.

The IMF lists 187 countries as members and has been assisting them with varying success since the end of World War II.

In her first major public speech at the Council on Foreign Relations in New York City on July 26, Lagarde pointed to the issues of sovereign debt, economic growth and social instability as her main priorities at the fund, where she was elected president in early July. Her predecessor in the job was her compatriot Dominique Strauss-Kahn, who was forced to resign after being accused of sexual assault earlier this year.

Lagarde said fiscal problems in southern Europe have revealed the risks posed by an imperfect economic and monetary union. She noted that eurozone leaders had reached an important agreement, including a commitment to finance program countries until they can regain market access, as long as its measures are implemented effectively.

“I’m certainly hopeful that this brave political move, which in my view is really a major shift in the European construction, leading the way to fixing this monetary union that was only half-constructed and not completely defined – I hope that this courageous move will be followed as well in the United States," she said.

On the U.S. debt ceiling dispute, Lagarde said that the issue needs to be resolved immediately. Indeed, an adverse fiscal shock in the United States could have serious repercussions for the rest of the world. More fundamentally, she said, a credible fiscal adjustment plan is needed sooner rather than later.

“Frankly, to have a default or to have a significant downgrading of the United States signature would be a very, very, very serious event – not for the United States alone but for the global economy at large because the consequences would be far-reaching,” said Largarde.

Lagarde commended her predecessor at the fund, Dominique Strauss-Kahn, for demonstrating the IMF’s relevance during the global financial crisis, when many doubted its ability to weather a calamity of such proportions.

“The fund is clearly and has been back in business. The previous managing director, Dominique Strauss-Kahn, did a very good job at resetting the IMF as a credible partner, as a source of intellectual caliber of the highest level," she said. "And that has been much appreciated in addition to having the right level of resources in order to address the crisis that we went through.”

Rapid growth in the emerging economies has been critical to sustaining the global recovery and reflects the pay-off from better macroeconomic policies in recent years, Lagarde said. But she warned that some of those economies are now showing signs of overheating. If policymakers wait too long to address the problems, she said, a hard landing could be the result.

Lagarde also warned that social problems are a major concern even in advanced economies. The young in particular are having a hard time finding work – with potentially lifelong implications in terms of employability and income. At the same time, the older generations are fighting to protect their health and pension benefits. Combine the two problems and a “clash of generations” could be the result. This is why, said the IMF director, that focusing on the right kind of growth is so important.

Overall, the IMF expects fair global economic growth in the near term – approximately 4-4.5 percent through 2012. But the recovery remains unbalanced, and substantial risks remain, Lagarde said.