April 9, 2015


Atlantic Council
 
A Conversation with Christine Lagarde on the Global Economy
 
 
Speaker:
Christine Lagarde
Managing Director
International Monetary Fund
 
Welcome and Moderator:
Frederick Kempe,
President and CEO,
Atlantic Council
 
 
Location:  Atlantic Council, Washington, D.C.
 
Time:  10:30 a.m. EDT
Date:  Thursday, April 9, 2015
 
 
 
 
Transcript By
Superior Transcriptions LLC
www.superiortranscriptions.com


FREDERICK KEMPE:  Good morning.  I’m Fred Kempe, president and CEO of the Atlantic Council. 

And it’s my pleasure to welcome this impressive and impressively large audience.  We have no more seats available and some people in our hallway.  Let me particularly welcome our Atlantic Council board members, Atlantic Council members, members of the diplomatic corps and public officials, as well as our online and television audience.  If I had known how popular your appearance would be, Madame Lagarde, I might have tried to scalp the tickets.  (Laughter.) 

It’s an even greater pleasure to introduce our speaker, a remarkable leader navigating difficult times and wrestling with a vast array of challenges every day with grace, courage and clarity, ranging from Ukraine survival to the European Union’s future to broader underlying issues we’ll discuss today regarding where the global economy will draw its future strength and sustainability.

After Madame Lagarde’s opening comments, a curtain raiser – as we used to call it at The Wall Street Journal – ahead of next week’s IMF and World Bank annual spring meetings, I’ll engage her in a conversation, also drawing upon audience questions here and online.  So I encourage you to continue to submit your comments and questions using the hashtag #ACGlobalEcon. 

It’s no secret that I, and the Atlantic Council more generally, are fans of the managing director of the International Monetary Fund.  I first ran across Madame Lagarde, Christine, when The Wall Street Journal Europe was putting together its 2002 top European women in business rankings – this was an inaugural effort; I was then editor there – to celebrate women who were pushing through the mostly male ranks of corporate Europe. 

The jury of experts ranked her among our top 10 finalists.  But then they had a dilemma, as a French lawyer at a partnership organization, was she really a business leader?  And as she chaired a Chicago-based company, though it was global, did she count as a European executive?  But the editor intervened and the judges were taken by her accomplishments and the certainty that she would only achieve more. 

It was revolutionary that Baker & McKenzie, then the world’s third-largest law firm, had elected her as the first woman, the youngest partner and the second non-American to ever run the firm.  Our Wall Street Journal jury marveled at her remarkable consensus-building skills – such an underestimated and historically crucial talent that she demonstrates at the IMF.

Our jury placed her at that time number five on our list, which I at the time referred to as a result of our Chicago penalty.  But if I name the other four for you today, you wouldn’t know them.  Nine years later in 2011 another jury, this time at the Atlantic Council, this time got it more right when we gave her our highest recognition in New York, alongside the U.N. General Assembly, the Atlantic Council’s Global Citizen Award. 

By then, she had been finance minister in France, atop the Baker & McKenzie experience of steering 500 lawyers egos at 60 offices around the world, good preparation for running for the IMF and its impressive staff of more than 160 nationalities in 182 countries, often in unstable and corrupt settings. 

In presenting the Atlantic Council’s award to you, Madame Lagarde, World Economic founder Klaus Schwab said, quote, “I would define a leader with four characteristics – to have a soul, to have a heart, to have brains and to have good nerves.”  Leader, by and large, don’t get choose the challenges they face.  They only get to choose how they address those challenges.  And how you’ve done so in your time at the IMF has been remarkable. 

We look forward to hearing your opening comments today, Madame Lagarde, on the state of the global economy and how we might best address its most pressing challenges.  We, at the Atlantic Council, often speak of how we together as the Atlantic Community, alongside our like-minded global friends, confront a defining moment in history, perhaps as pivotal as 1919, 1945 or 1989 when the decisions of leaders, like yourself, and that of the member countries you represent have outsized importance.

So as I turn the podium to you, let me paraphrase Klaus Schwab in thanking you for making all the personal sacrifices that public service requires in such challenging times and, using his words, salute your soul, your brain, your heart and your nerves.  Madame Lagarde.  (Applause.)

CHRISTINE LAGARDE:  Well, thank you so much, Fred.  And I know you’re a true friend because you’re one of the very few who introduces me without referring to my muscles, because people typically refer to my belonging to the synchronized swimming national team in France.  (Laughter.)  So thank you for that.  And don’t believe that Fred and I always coordinate our colors, but it so happens that we are black and white together.

The Council, Fred, both members and members in the audience, is renowned for its capacity to actually bring together top international policymakers from both sides of the Atlantic and from further apart.  And this is clearly something that is in common between our two organizations – the Atlantic Council and the International Monetary Fund. 

Next week, we will be hosting the spring meetings of the World Bank and the IMF, and we will be welcoming to Washington, D.C. representatives of our 188 member countries.  Finance ministers, governors of Central Banks.  And they will focus their discussion on the state of the global economy.

And since our last Annual Meeting in October, there have been a lot of developments on the global scene.  I would say that it has, first of all has benefitted from a big shot in the arm as a result of the decline of oil prices.  In addition to that, it has had the benefit of the strong economic performance by the largest economy in the world, the United States of America.  And overall, we would say that macroeconomic risks have decreased.

So the global recovery continues, but it is moderate and uneven.  Global recovery continues, but it is moderate and uneven.  In too many parts of the world it is not strong enough.  And in too many parts of the world, people don’t just feel it.  In addition to that, if macroeconomic risks have declined, financial and geopolitical risks have increased.

It is not that overall growth is bad – 3.4 (percent) in 2014.  It is not bad.  It’s actually in line with the average growth that we have had in the last three decades.  So what’s not so good about it?  What makes it moderate and uneven?  Well it is rather that, given the lingering impact of the Great Recession on people, it is actually generating hardship for many people around the world – including those countries where more than 50 percent of the youth population goes unemployed.  So growth is not good enough.

Six months ago, I warned about the risk of a new mediocre – new mediocre, low growth for a long time.  Now, today what we must do is avoid that new mediocre becomes the new reality.  We can do better and we must do better.  That great Atlanticist, John Fitzgerald Kennedy, once said, and I quote, “There are risks and costs to action.  But they are far less than the long range risks of comfortable inaction

So comfortable inaction is what must be avoided.  And that’s what I would like to focus on – how to lift growth today by using all available tools and policy space available; how to lift tomorrow’s growth and prevent that new mediocre from becoming the new reality; and how do we work together to strengthen the international financial system, foster development and make growth more inclusive and actually sustainable.

Let me begin with a quick health check of the global economy.  Now, those who follow the IMF know that The World Economic Outlook will be published next week, so I’m not going to focus on numbers.  They belong to The World Economic Outlook.  I’m going to talk about the broader trends and policy recommendations.

As I indicated earlier, growth remains – and we forecast it to remain moderate, roughly the same as last year.  Advanced economies are doing slightly better than last year.  And as you all know, the recovery’s firming up in the United States and the United Kingdom.  And the eurozone is doing slightly better as well, and is promising.

But if we look at the emerging and developing economies, they are doing slightly worse than last year, with lower commodities being the driver.  And while they still represent and probably will continue to represent about 70 percent of global growth this year, there is tremendous diversity within that group.

Do you remember the talk about the BRICS?  Well, the picture has changed.  And if India is a growth-bright spot in that group, China is slowing although its growth is certainly more sustainable.  Sub-Saharan Africa continues to perform strongly, but Russia is experiencing economic difficulties.  Brazil is stagnating, at best.  And many parts of the Middle East are beset by political and economic turmoil.  So we should not think of emerging economies as just one single group.  Each country faces very specific circumstances – some of them easier, some of them more difficult. 

So what does it imply in terms of policies?  With overall growth moderate, the global economy continues to face a number of significant challenges.  There is, for instance, what I have called last year the low-low, high-high risk.  And that is low inflation, low growth, high unemployment, high debt.  And that risk persists for a number of advanced economies.  Clearly, as a result, all policy space and levers must be utilized.  And it begins with demand support.

How is that implemented?  Well, first of all, continued monetary policy accommodation is needed, especially in the Euro area and in Japan.  Fiscal policy needs to be calibrated to the strength of the recovery, without ever losing sight of debt sustainability.  But the effectiveness of those demand-support measures can be significantly improved, because they may not work, for some of them, for a little while.  They can be improved.

For example, unclogging the channels through which monetary easing and fiscal policy work in the Euro area.  How?  Well, effective insolvency frameworks are crucial to tackle the private debt overhang and deal with the total stock of no less than 900 billion euros of non-performing loans that is blocking credit channels.

In Japan, the authorities need to sustain the momentum of the second and the third arrows – one is fiscal consolidation; the other one is structural reform – if that country is going to take the full benefit of the first arrow, which was indeed monetary easing, in order to lift both growth and inflation.

Third way of being more efficient:  By leveraging lower oil prices to reduce energy subsidies, emerging and developing oil importers could save, on average, a full 1 percent of GDP in 2015 alone.  And those resources could be put to better use in order to invest in infrastructure, in education, in health.

So those are some of the macroeconomic dimensions.  And as I said, macroeconomic risks have decreased.  What has increased, on the other hand, is the risks posed by the financial dimension.  Financial stability is more at risk now than it was six months ago.  The new mediocre that I talked about, that new mediocre growth, is not a comfortable place with respect to financial stability.  Financial risks have migrated.  For example, they have migrated from banks, which are far more regulated and better supervised and heavily tested, to non-banks.  They have migrated from advanced economies towards emerging markets.

Let’s go through a few of those risks.  For one, there are adverse side effects of the very low, or even negative – as we clearly saw, including on the primary market today – very low if not negative interest rates caused by otherwise necessary accommodative monetary policies.  These foster a higher risk tolerance on the part of investors, which can lead to overpricing.  And if the low interest environment persists, it can create solvency challenges for life insurers and defined benefit pension funds.  So the purpose of these policies is to actually kick-start growth.  But if it was to last longer, then it puts some of those business models at risk.

Or think of another one, the wide movement of exchange rates that we have observed recently.  Over the past six months, the U.S. dollar has appreciated against a basket of major currencies by 12 percent in real terms.  Now, some countries with more difficult macroeconomic conditions and less policy space have, of course, benefited from the relative depreciation of their currencies.  In others, large amounts of dollar-denominated or foreign-currency denominated debt. 

These dramatic swings can be destabilizing. And this is particularly the case for corporate in emerging market economies that are wedged between a strong U.S. dollar on the one hand, lower commodity prices on the other hand, and with my third hand, higher borrowing rates – on the top of which they might not have hedged, and that is a bit of an uncertainty where we have little information.

Now, these risks, taken individually – the ones that I’ve just mentioned – could be manageable, but we also have to contend with a structural decline in market liquidity.  It’s a risk that we had flagged about six months ago.  And this is due primarily to recent changes in the structure of the asset management industry in advanced economies, which have created a mismatch in the maturity of assets and of liabilities. This means that liquidity could evaporate quite quickly if everyone rushes to the exit at the same time –which could make for a bumpy road when the Federal Reserve begins to raise short-term rates.

So this new configuration of financial risks underscores the importance of strengthening financial policies.  At the global level, it means ensuring market liquidity during times of stress, improving macro- and micro-prudential policies for non-banks in particular, and following through on the regulatory reform agenda – particularly the “too big to fail” institutions.  At the country level it means curtailing excessive risk-taking and managing existing vulnerabilities.  And again, while the appropriate menu of measures must be country-specific, the overall set of policies can help us to lift growth today.

 

So much so for growth today – as I said, moderate, uneven, but recovery underway, but what about growth tomorrow?  And that’s a big issue because growth tomorrow, as we analyze the potential for growth, is also moderate.  In both advanced and emerging economies, potential growth is being pared down.  And this largely reflect several factors.  One is lasting scars from the financial crisis that the world experienced a few years back now, and probably scars that we had underestimated, but also the undercurrents of changing demographics and lower productivity.

So to prevent the new mediocre from becoming that new reality, structural reforms need to go hand-in-hand with macroeconomic and financial policies to raise confidence and generate investment.  And frankly, when you look around, there are too many countries that talk about structural reforms, but don’t actually do structural reforms at the depth, at the speed where they should be done.  And structural reforms really span a wide range of policies.  Some reforms have immediate effect.  Most reforms have more medium-term effect and take a bit longer to bear fruit.

And I’ll give you an example of one – I wouldn’t call it a reform, but it’s a set of measures that requires often reforms and a bit of creativity around PPS, for instance.  But some reforms are right at the intersection of what can actually have an effect in the short term and will certainly improve productivity in the medium to long term.  And this is infrastructure investment.  Our own research shows that boosting efficient infrastructure investment can be a powerful impetus for growth both in the short run – you stimulate activity, construction sites start employing people – and in the long run – you improve productivity, you improve infrastructure, you make sure that goods, people can actually travel properly.

Other reforms, such as those that affect the labor, the product, and the services markets are likely to unfold positive result over a longer-term horizon.  Yet, they are essential to enhance productivity and innovation which, in turn, can be powerful antidotes to the impact of something that we cannot do anything about and that is affecting all of us, aging.  (Laughter.)

We’ve done a bit of research, not so much on aging – other people can do that a little better than us – but we’ve done some research on structural reforms, and we’ve tried to flesh out priorities and payoffs in the area of productivity growth, labor force participation, and trade.  So let me take them very quickly one after the other.  Let’s look at productivity growth.  Reversing that decline in advanced economies requires lowering barriers to entry in product and services markets.  Our research shows, for instance, that improving the allocation of labor and capital across sectors can significantly increase total factor productivity – TFP, as it’s called. 

Another example is the potential benefit from improving access to finance for smaller businesses.  You know, everybody talks about SMEs.  We have to encourage SMEs.  Well, of course – of course, because they generally, in most countries – certainly the advanced economies but also now to a much larger extent in emerging market economies – they represent most of the employment and they represent the largest number of companies. 

Well, unfortunately, if we look at Europe, for instance, they also hold a share of non-performing loans that is 50 percent higher, on average, than larger corporations.  So clearly, putting the small business sector on a firmer footing would yield a big payoff.  This is the same story in China, where small businesses play a critical role in the economy in terms of output, employment, tax revenue, and innovations – and where access to financing is extremely difficult.  I discussed that matter with the prime minister of China, and it’s one of the angle that they want to use in order to stimulate activity by the corporate world. 

If we look at emerging market economies, such as Indonesia and Russia, they can reap productivity by easing investment limits and improving the business climate.  And countries like Brazil, India, South Africa – they should certainly focus on reforming the education, labor, and product markets.  And in low-income countries, as well as in the Middle East and Central Asia, improving governance, eradicating corruption, or trying to, as well as financial inclusion will help lay the foundation of a thriving private sector.  So that’s for the productivity improvement, as far as capital and investment is concerned. 

If we look at labor now, there’s an important set of measures that is needed to remove barriers to labor force participation.  And that is key to tackle inequality and ensuring broad-based growth.  I’ll give you a few for-instances.  In Japan and the Euro area, there are too many tax disincentives that exist, and where a change of tax policies that would be more growth-friendly, more labor supportive would be very welcome.  And they could be budget-neutral. 

In too many countries, legal inequities still exist.  And what do they do?  They create barriers to greater participation by women in the economy.  We’ve done a very interesting study.  And from all the countries that we’ve studied 90 percent – 90 percent – still had legal inequities in the books that prevent access of women to the labor market.  And as we know, closing the gender gap – which is one of the goals of the G-20 – only by 25 percent, a little 25 percent, over the next decade could actually result in the creation of 100 million jobs.  Now, that means something for both growth and poverty reduction.

And finally on trade, there are potentially huge global gains to be had from further trade reform and integration.  As we know, trade has been a major driver of economic progress over the past three decades.  And yet, again in 2015 and for the fourth year now, trade will be below-average trade in terms of growth.  Recent efforts have been welcome.  The Bali agreement, which was a subset of the Doha long-expected loan agreement, could actually generate a lot by way of trade facilitation – estimated to actually deliver an economic boost of $1 trillion annually.

Not only should this Bali agreement be implemented, but we need to be more ambitious, because trade remains a very major engine of the global economy to lift growth, create jobs and dispel this new mediocre that is lurking on the horizon.  Of course, it’s difficult.  Those are political reforms.  And anything that is structural reform or that requires international consensus is difficult.  They involve tough choices, tradeoffs.  And there are winners and losers in the short run, but in the long run, everybody can win.

So, how do we win?  Well, our view – my view is that we can only win by working together.  And I’m struck by how action to lift growth is becoming increasingly country-specific.  You know, gone are the days when you could say “the advanced economies,” “the emerging markets,” “the low-income countries.”  No.  It’s a matter that is far more complicated, which probably includes something like 128 boxes, depending on what criterias you use. 

Yet, all those issues that I have referred to – macro economic, financial risks, productivity increases – all of that is also very strongly interconnected and multilayered.  So the challenge for policymakers around the world is to combine the policies needed to boost today’s growth with those that will fortifying tomorrow’s prospects.  How can you actually use your short game to make sure that the long game is going to work?  And to leverage those national initiatives that are needed to the benefit of the global community.

And if you look at it – think of it, what is good for a country is going to end up being good for the whole community.  If countries strengthen their banks – take domestic banks – it will not only serve them well, and their clients, but it will reinforce the global financial system.  If countries anticipate and hedge against currency variations and volatility, it will not only serve them and their own financial sector, but it will support global financial stability. 

And if countries implement climate-friendly policies, it will benefit their population and also contribute to reducing global emissions.  So to all those who will say, oh, we have to wait until the others come on board and reach an international treaty or agreement or something that is intergovernmental – no.  National policies will actually take the global issue further.

But we also need a multilateral system that can actually leverage these national benefits and help avoid inconsistencies, risk of arbitrage that could actually generate negative spillovers.  In a highly interconnected world with new and dynamic centers of political and economic gravity – generally east – there is simply no alternative to what I have called new multilateralism.  So what is that and what needs to be done to reach that new multilateralism platform?

Well, first of all, everybody must find its suitable seat.  Emerging market and developing countries must have greater weight and voice in global economic institutions to reflect the actual new reality and that of their contribution and responsibilities in the global economy.  Now, I have a clear example in mind, the IMF 2010 quota and governance reform, which is intended to precisely meet that objective.  Listen to that, virtually our entire membership agrees.  And we now only await one ratification by the U.S. Congress.  It is overdue.  So if you meet any of them, tell them.  (Laughter.)

And we are not going to give up.  I’m going to continue asking them to please do it, if only to assert U.S. leadership in a key institution for global financial stability.  But, you know, we can’t wait forever either.  So our membership is currently considering interim steps – I’m not saying substitute – interim steps that can take us a bit closer to the ultimate objective.

Now, there are further measures as well to strengthen the resilience of the international financial system.  And that would include:  enhancing cooperation with regional facilities and institutions, including the new Asian Infrastructure Investment Bank, as I have said three weeks ago in China.  There are many institutions that have burgeoned over the last few years in Europe, in Asia, in various places.  And we need to work together, we need to cooperation, to coordinate.

Second option:  increasing the role of the special drawing rights as a global reserve asset and facilitating the integration of dynamic emerging markets into the global economy.  And of course, firming up the IMF resources which, again, relates to the quota reform that was intended in 2010.  And as a result of that, the international monetary system would be reinforced and become more stable.  So that’s for the international monetary system.

What about the international development system?  Well, 2015 is really a very special moment for development, and an opportunity to make a tangible difference in the lives of a very large number of people, particularly the poorest.  There are three critical issues on the 2015 agenda.  One is financing for development, which will be discussed in Addis Abba in July.  The second is the new sustainable development goals that will be discussed at the United Nation in September.  And the third one is the climate change that will be discussed in Paris in December.  And they all interlink in many ways. 

Now, the IMF will be a committed partner in this effort.  And I intend to discuss with our membership next week how we can contribute through not nice words, not good intentions, but actual deliverables in the three core areas of our business, because we cannot suddenly invent ourselves as the new development experts, or the climate gurus.  But we have areas of business which are our core businesses where we can certainly contribute.

Let’s look at financing first.  Actually, we’ve already made a down payment by recently contributing $390 million to the Ebola-affected countries, including – which is very usual for the IMF – 100 million (dollars) of debt relief.  We – the IMF doesn’t do that.  But on that particular occasion, the board very strongly endorsed that proposal.  What we have done as well is that we have set up a Catastrophe and Containment Relief Trust, because we realized on the occasion of this drama that affected Sierra Leone, Liberia and Guinea, that we did not have the adequate instrument.  And we had to repurpose resources.  We will, in addition to that, explore the potential to increase access to IMF resources for our poorest members.

Second core area, policy advice and analysis.  We will continue to help our members with essential support for what very often the low-income countries need badly – domestic resource mobilization, capital market development, and, where it exists, deepening.  In addition, we will push further on macro-critical issues – some that people have considered a little bit on the side of our core business, but which are becoming core business and matter enormously. 

And I’m here thinking about the role of inequality and excessive inequality, the role of women in the economy and their contribution to the labor market, the energy subsidy reforms where we have extensively now published and given some very practical set of recommendations using a range of countries that have actually either succeeded or failed, and carbon taxation, which is a very interesting proposition.  And we all know that the time is right to price it right.  And if we do that, it can help us to get it right on climate change.

Our third and last core business area is capacity building and technical assistance.  And here, we are expanding services, including through nine regional technical assistance centers and seven regional training centers located in Africa, Asia and the Middle East.  And what’s more, we have embarked on MOOCs, massive online open course, which already have 10,000 active participants and already 5,400 graduates, in courses as complicated as, for instance, debt sustainability analysis or removing energy subsidies.

As I said, we can only get it right if we work together.  And this applies to all the areas that I have touched on – from stronger growth today to better growth tomorrow, from a more resilient international monetary system to a more robust international development system, from the world we live in today to maybe a better world that we will help build.  Success will require a recommitment to the principles of international cooperation that have served us well for the last 70 years and particularly in moments of crisis. 

But this new multilateralism is urgently needed to boost growth and generate confidence in our common future.  Wouldn’t it be nice if a year from now – I might come back – if a year from now instead of rejoicing in the AIIB and the Silk Road and this belt out there, we could also celebrate the TPP, the TTIP, the IMF reform, a strong green fund with good governance, Paris21 with actual deliverables?  These are the challenges we have ahead of us.

So I began this morning with a great Atlanticist, President Kennedy.  I’m going to use another great Atlanticist from the other side of the pond, Winston Churchill, who once said:  “I never worry about action, only inaction.”  Well, we can and we must lift better growth today and tomorrow.  Thank you.  (Applause.)

MR. KEMPE:  Thank you so much, Madame Lagarde, for that very important speech, and also that not entirely convincing British accent at the end of it.  (Laughter.)  And you’re right that I failed the mention the synchronized swimming because one sees it too often.  But I also read, as I was doing my research, that you – that you were a French tour guide at Alcatraz Prison.  And I don’t know what that –

MS. LAGARDE:  Correct.  (Laughs.)

MR. KEMPE:  But there is so much meat in that to follow up on.  And we have a brief 15 minutes here to follow up.  So let me try to go through some of it where I think we really need to drill down just a little bit further.  First of all, did the Greeks repay their loan?

MS. LAGARDE:  Yes.  I’ve got my money back.  (Laughter.)

MR. KEMPE:  Good.  So we can get that out of the way for all the press.  That is now confirmed from the IMF.

You met with the Greek finance minister last weekend.  This week he was in Moscow.  I’d like to ask you two questions:  What do the next steps look like?  And perhaps you can put that in the overall context of how resilient you believe the eurozone is, both economically and structurally?  You see the low oil prices, the quantitative easing, the reduction in the euro’s value all helping.  But on the other hand, you also point to reforms that haven’t been done, et cetera, so is there a light at the end of the tunnel or is it an oncoming train, to quote a country western tune?

MS. LAGARDE:  Let me take the second part of your question first, and I’ll touch on the first part as well.

You’re right, I think, that the eurozone has the benefit of three shots in the arm, actually – the ones that you’ve just mentioned.  And that moment, which is actually rare in economic history, for a particular economic zone – especially one as large as the eurozone – is really a moment, a window of opportunities when countries that have not yet conducted the reforms, that have started conducting the reforms have to actually get on with it, because they have the benefit of low oil prices; very low cost of financing, I mean, we’re seeing on the secondary markets negative rates even for reasonably medium-term bonds; and the quantitative easing that is intended to really support and kick-start the economy. 

So with threes three factors, if they don’t do economic reforms now it’s to despair.  So I very much hope that they are going to really continue the process.  Some of them have started.  And others I hope will continue. 

Now, one thing that I would like to add as well is that since some three years ago when we were both talking about those issues and the risks on the horizon, the Euro area as a monetary zone has strengthened, it has build a European systemic fund to protect itself, which is endowed with over 500 billion euros.  It has reinforced its fiscal union.  It has certainly built a banking union.  And of course, it can do more and better but it is a lot stronger than it was three years ago, which takes me to the first part of your question. 

What is now badly needed is not to, you know, talk but is to actually get on with the work.  And Greece authorities, together with the representatives of the three institutions, as we call them now, have to really sit down, go through the work, focus on the objective of what is intended for the better for Greece, which is restoring the economy, stabilizing it and, by so doing, re-establishing and reinforcing the sovereignty of the country. 

So we are, for our part, completely committed, including on weekends – (laughter) – wherever – in Athens, in Brussels, in Washington – to actually help the authorities navigate through the measure that will actually deliver on the objectives of the program, while respecting some of – some of the commitments that have been made in the course of the political cycle.  It’s a difficult path, but it’s one that has to be walked, and which will just improve the situation.

MR. KEMPE:  Thank you for that.

Let’s talk a little bit about your new mediocre.  You’ve coined this term.  I think it’s a great term.  We must prevent the new mediocre from being the new reality, you said.  You then talk about the bottom line is that risks to global financial stability are rising.  And again, the new mediocre growth environment is not a comfortable place with respect to financial stability.  Is the new mediocre another term for secular stagnation?  Is this what you’re worried about?  And is that what we’re facing – will the world economy face a prolonged period of low growth?  And what impact might that then have on security and stability?  How great is your worry about that?

MS. LAGARDE:  You know, I think it is distinct from the secular stagnation, which as been borrowed by Larry Summers to identify the current economic situation.  I think it’s different because my concept of the low mediocre – the new mediocre is that we can get out of it.  It’s not something that is intended or that we risk seeing for a long period of time.  If the measures that I have identified earlier are taken, all tools used on the macroeconomic front, all space make available utilized, and if financial stability is strengthened, and if structural reforms can be implemented – each very specific based on countries’ characteristics and needs – then we will not be in that new mediocre. 

But it is a risk that is there, which is I believe accentuated now by the fact that potential for growth has been affected by the three factors that I’ve mentioned – the scars of the crisis, the aging of population and – particularly in the advanced economies but also some emerging market economies – and the fact that productivity is not where it should be.

MR. KEMPE:  The – so I think that’s a very good differentiation, where secular stagnation may be a description of a case that’s unchangeable and new mediocre is a warning that you’re trying to avoid.

MS. LAGARDE:  Yes, yes.  Yep.

MR. KEMPE:  Let me get to the issues – and let me put together the issues of the Asian Infrastructure Investment Bank and the 2010 quota and governance form.  You described the establishment of China’s Asian Infrastructure Investment Bank as a massive opportunity.  That said, Larry Summers, a member of our International Advisory Board, you already mentioned him, this week in a – in an op-ed called the U.S. approach to the AIIB a failure of strategy and tactics and said, quote, “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”

Number one –

MS. LAGARDE:  I tell you if he was right, I think the best response to that is to ratify the reform of the IMF.  (Laughter, applause.)

MR. KEMPE:  You finished my sentence.  As – usually I just steal your ideas.  This time you finished my sentence.  But so that is really what I was getting at.  Number one, does the formation of the AIIB in some ways signal a new economic reality?  And in that context, do talk a little bit even more in-depth of this reform.  Is the U.S. undermining its role as the leading country to contribute to financial order?

MS. LAGARDE:  You know, I think that the Asian Infrastructure Investment Bank was part of a broader project by the Chinese authorities to actually develop growth, build infrastructure projects, and stimulate growth and economic activities, not only within China but also with many neighbors along that old Silk Road and down along the maritime road.  So it wasn’t, you know, a huge structure, if I may say, but it was part of thinking along the lines of we need to develop broader – and there are countries along the way pointing towards Europe that will actually benefit from that, and will our internal manufacturing infrastructure.

I think it has been elevated a bit because of the general context in which that bank has been – has been now set up, as of March the 31st.  But it’s a great initiative in the sense that it’s broad spectrum, it reflects the transformation of the global economy with new key players, and it embraces a regional approach which could actually be extremely simulative for economies that matter more and more today than they did a few years back.  So it’s both – I think it is part of something which is broader and it really reflects a new landscape for the global economy.

Now, what can the United States do to reinforce its natural leadership role in the global economy, as well as in the international monetary scene, is to effectively ratify a reform which is a governance as well as a quota reform, that was engineered by many countries, particularly by the United States back in 2010.  What does it do?  Two things – number one, it gives a bit more space to the likes of the emerging markets and some underrepresented countries – so a bit more space at the table.  It reduces a little bit the participation of the Europeans, which as been probably excessive relative to their size in the global economy. 

So you rebalance – a bit less Europeans, a bit more emerging market economies.  You double the quotas, which doesn’t have any budgetary implications because the new arrangement to borrows have been already earmarked and are in the United States budget.  Some of it has to be put into the form of quota, which gives an institution more stability.  So doubling the quota, which gives more financial resources if and when a crisis occurs.  And that’s pretty much what it is.

So the United States doesn’t lose its veto right in the institution.  It continues to be the key shareholder and member state of the IMF.  And it takes zero financial risk.  So I think it’s a no-brainer, but.  (Laughter.)

MR. KEMPE:  Let me – let me ask one more question that you touched on.  John Kerry – Secretary of State John Kerry will be here soon at the Atlantic Council.

MS. LAGARDE:  He’ll be here with you?  Oh great.

MR. KEMPE:  With us, really launching a campaign around these trade issues.  And we are particularly highlighting the geostrategic and geopolitical importance of trade issues.  Instead of focusing on all the gains that would be had from TTP and TTIP, look at the other side.  What happens?  Is there a downside if it doesn’t happen, if we get to the end of this administration and there’s no trade promotion authority, there’s no TTIP, there’s no TPP and there is no IMF reform ratification.  What is – instead of saying everything we would gain, what happens if none of that goes through – which could be an outcome?  It is a possible outcome.

MS. LAGARDE:  Well, you know, I’ll put my sort of corporate hat for a second.  And I’m a big U.S. corporate and I want to invest.  I know that there is a massive growing market out there in the East.  And if there is no facilitation of trade, if there is no better tariff arrangements and no more alignment of standards around the world, instead of necessarily investing in the United States of America I’m going to look at other investment opportunities and probably invest where there are very serious growing markets – either in terms of purchasing powers or in terms of population.

You know, I always think of Mr. Heineken when he was investing around the world.  He was generally looking at where there was a lot of light, because he knew that that’s where people would actually buy and drink beer.  Well, big corporates, that’s what they do.  And if there is no facilitation, no lowering of the barriers, then you have to do – you have to be everywhere to expand and you have to invest outside.  So to those who say it’s going to reduce employment, it’s going to be bad for labor – I don’t think so.  I really don’t.

MR. KEMPE:  So let me just take one question.  I’m sorry that – I’m sorry that we really have run out of time, but I’m looking –

MS. LAGARDE:  It’s my fault.  I spoke too long.

MR. KEMPE:  No, no, you – it was a brilliant speech.  The – so let me – again the wall, please, you had your hand up first.

Q:  Hello.  Robert Sherretta with International Investor.

Madame Director, the U.S. dollar is at an all-time high.  Along with the growth of the world, we’ve seen the growth of indebtedness, much of it held in U.S. dollars, repayments schedules in U.S. dollars.  If interest rates rise here, that problem could be exacerbated.  Are you concerned that it could create a crisis with any of the world’s currencies?

MS. LAGARDE:  I’m sure you listened very carefully to the risks that I’ve tried to identify.  And that’s the one that I have flagged, together with the persistently low interest rate, which causes another type of risks.  But clearly, the exchange rate and the currency risks and the volatility that it creates is one of those rising risks.  Also a migrating risk, as we call it, because it is probably going to affect more some of the emerging market economies and particularly the corporates in those economies that have actually borrowed in U.S. dollars or pegged currencies – because it’s not just U.S. dollars, it’s also those that are U.S. dollar pegged and which have not hedged.  And that’s where we see the potential origin of a risk that could be significant.

MR. KEMPE:  Thank you for that.  And –

MS. LAGARDE:  And, as you rightly said, exacerbated by the potential rise of interest rates, you know, likely at the end of the year.

MR. KEMPE:  So thank you, Madame Lagarde.  Let me close and thank you on behalf of the audience, and also ask people to just say in their seats for a couple of minutes because I know you have to get to another meeting right outside here.

This was a great, terrific conversation – wonderful speech.  I am going to hold you to what was on the podium.  We’ll get you back a year from now.  (Laughter.)  We’ll see how we’ve done.  And I really look forward to having you back at the Atlantic Council.

MS. LAGARDE:  Well, I’ll add something.  I’m absolutely coming back if we can celebrate the TPP, the TTIP and the IMF reform.  (Laughter, applause.)

(END)

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