When the head of the IMF "thinks there is some good news," and applauds Japan for its "innovation," it is clear that Christine Lagarde is struggling for positives in this interview with Bloomberg TV. Though she says all the right things, dots-the-i's-and-crosses-the-t's off as a confidence-inspiring global elite should do, the lack of enthusiasm is clear. "I'm deliberately, decisively, desperately optimistic," she exclaims even as she admits that they just downgraded global growth expectations and somewhat slams the US for "blind and blunt" fiscal consolidation, preferring instead "austerity... but not front-loaded." All-in-all, "a bit of work needs to be done," is as good as it gets for now.
Lagarde on what the ECB should be doing:
"The ECB has done an awful lot. For the last couple of years, it’s just incredible how much out of its traditional boundaries it has gone…It’s the only central bank that still has a bit of space. And I trust that they will be using that space when they feel that it will be most useful and they have the biggest leverage effect. What’s in it? It’s not just the sake of reducing rate. It’s making sure that it travels to the real economy and that the banks that lend to SMEs, to households, will actually apply a lower rate as well. So it might be that to restore the fluidity, a bit of work needs to be done at – at the other end, at the receiving end."
On actions by U.S. and Japan's central banks and whether the expectations that they are setting are too high:
"Well, the unemployment target has always been part of the traditional targets of the Fed in the US. The Japan central bank has clearly innovated by pushing the inflation target from 1 to 2, by doubling the monetary mass by a factor of two, by deciding to do so within two years. It’s a two, two, two, two, which we welcome, which needs to be completed though by two other principles that have to do with structural reforms in Japan. Very much needed. Anybody who wants to enter the Japanese market will tell you so. And also the fiscal consolidation plan that needs to be anchored to reduce the Japanese deficits and the debt of Japan."
On whether she's optimistic:
"I’m deliberately, decisively, desperately optimistic, yes…I think there’s some good news. The fact that the average debt around the world has stabilized, too much there is of it. It has now stabilized and the deficits on average has been halved since the beginning of the crisis. So there are some good news. It’s a question of keeping at it and pursuing the major reforms that have been initiated."
Lagarde on what the prescription is for dealing with different economies around the world that are recovering at different paces:
"We would like to move to full-speed recovery and not three speed. It would be far more efficient and there would be more spillovers between the various zones. For the moment, we have that three speeds. We have the emerging market economies and low-income countries. We have – moving very fast and doing quite well. We have the second group which is on the mend, which has done quite a bit of work, particularly on its financial sector."
On the IMF downgrading global growth forecasts:
"First of all, let me observe that we have slightly downgraded, but we are moving up from last year a little bit, not much, but up. So the global economy is growing thanks to essentially the emerging market economies and the developing market economies. So it’s growing. What in our view could help it to grow better and faster would be the completion of the financial sector reform, would be the completion of the rebalancing between the various economies, and would be a clear focus on a sensible fiscal consolidation path, and could – in the medium term – and specific measures intended to develop growth, jobs and equity. So you have two – it has to walk on two feet. And one is a set of combined policies that are specific to each of the three groups, and those three construction sites, if you will, that have started but need to be completed."
On the IMF's criticism of the fiscal path of the U.S. and what we are missing:
"Time. Because what is needed is clearly fiscal consolidation, but good fiscal consolidation, not blind…Blind and blunt is the problem. Sequestration produces just that. And we need fiscal consolidation upfront, but not too much of it. At the moment, we see too much of it. 1.8 percent fiscal consolidation is too much at the time. But the US also needs more fiscal consolidation in the medium term, and clearly anchored, clearly communicated so that economic actors know what to expect and know that the determination of the US authorities is to bring the debt down not by cutting now so strongly, blind and blunt, as I’ve said, but over time and making it irreversible."
On whether the IMF is a defender of austerity on a global basis:
"We are not exclusively focused on fiscal consolidation, which is the scientific word for austerity, if you will. We are very concerned about the right balance, and that means lots of things. If you look at the policy mix, it means fiscal consolidation, yes, in all advanced economies pretty much because they are heavily indebted, and they are running deficits and have been running deficits for most of them. But it also means the right monetary policy in order to encourage growth, in order to lower interest rates in the long term. It also means structural reforms. Because in many economies, including advanced economies, you have bottlenecks. There are areas of business where one cannot go without having the right license, without having the right permission, without having the right set of attributes that very often are really obstacles in the way of unleashing the entrepreneurial spirit that is in each of us. So not just about austerity, but a combination of those three is very often needed."
On Europe's austerity measures:
"Most of them have to do some fiscal consolidation because they are heavily indebted and because they have and they are running and they have been running large deficits. But it’s a question of how much and how quickly. And for some of them, there is no reason to rush into upfront, heavily-loaded fiscal consolidation. Look at the Netherlands, for instance. They just decided, and I think they rightly did so, to reduce the pace, to continue to do it, but to allow a bit of time in order to let growth prosper, which is clearly needed and makes fiscal consolidation much easier."