At the annual meetings, two months ago, you made a call to “repair the roof when the sun is shining”. This has proved very popular: it has been repeated frequently since then by commentators and policy-makers, including by the European Commission this week in presenting its proposals for reform of the Eurozone. Let's start from your weather forecast, which may even have improved in the meantime.
In the last two months, economic growth has certainly continued to improve and continues to be broad-based, as it is consolidating in Asia, Europe, the US and Canada. Our forecast for global growth, 3.6% this year and 3.7% next year, is, if anything, more solid than it was back in October. In emerging markets, growth in some economies was at a very low level or negative and now is coming up. And it's fueled by different engines: trade is picking up, consumption continues to be strong, and investment is increasing. Measured by GDP, seventy-five per cent of countries are experiencing this upswing.
The sun cannot shine forever. What clouds do you see on the horizon?
here are a few. First, some countries are excluded from global growth and we should be mindful of them. It's about 40 countries, many are low-income, mostly in sub-Saharan Africa, that are seeing negative per capita income growth. Second, as the situation improves, monetary policy is going to be revisited. In some countries, as announced by Japan and the Eurozone, it will continue to be accommodative, but only for so long. In other countries, like the US and the UK, it is tightening. That could cause some of the clouds, because we have in the world levels of debt, corporate, household and public debt, which we have not seen for a very long time. The combination of asset price corrections, which are always possible, particularly as many markets are at very high levels, and the increased cost of financing would be another possible cloud. And countries have to guard against that. That's what I mean by fixing the roof now. Not to mention geo-political clouds, and there are plenty of those, which can have a big impact on economic developments.
Are markets too optimistic, or even irrational, about the future weather?
It is true that in many markets valuations are at a very high level, even the highest, in some cases. As always, there will be corrections. In my country, we say: “A tree does not grow to the sky”. Mind you, I am not predicting the timing of any of that.
Let's come to the repairs you called for. Everybody agrees on the need for them. But are they being implemented? Looking at the European situation, there have been proposals from the French president and the European Commission and others. But what chance do they have to go ahead?
At the regional level in Europe, it's very healthy that institutions and member states are having that debate on strengthening the architecture of the Eurozone. That may have been prompted by the shining sun but also by the context of Brexit, that has called into question the very raison d'être of Europe. Most people would agree that the monetary union was incomplete when the crisis hit and has been improved in the course of crisis management, but it needs to be made stronger, in terms of banking union, institutions and fiscal union as well. What form that will take is for the Europeans to decide. It is very healthy that there are several proposals around.
What is the IMF advice?
In our latest Eurozone annual review , we have made recommendations and will continue to participate in the debate. For instance, a stronger banking union needs a solid backstop using the ESM, to have deep pockets if needed. Now, whether there is a euro area finance minister or if the ESM is transformed into a European Monetary Fund, that is for the Europeans to decide.
What should the member states do?
There are countries that have conducted significant reforms, countries that are seriously considering reforms and others that will hopefully continue to deepen reforms. I will give you three examples. Spain is a country that did significant reforms in the past five years and it shows in terms of growth, fiscal position, and strengthening of the financial sector. A country that seems determined to reform is France. The program announced by President Macron to reform the labor market, professional training, the system of unemployment benefits, as well as the complete overhaul of the civil service and its digitalization, all aim to make the country more efficient and are very important reforms. In the third group, I would put Italy, which has started some reforms. For instance, the labor code has been modified, the reform of the judiciary is under way. But clearly more needs to be done. We are still observing rigidity in the labor market, with the duality of employment. The financial sector still needs to continue to be reformed. Non-performing loans need to be addressed properly. The bargaining mechanism in wage setting has to reflect developments in productivity. Those are some examples, but there are others.
Your last point may depend on political developments. Germany is without a government and no decision can be taken in Europe without a fully-functioning German government. Italy's elections may produce a stalemate, which will certainly not be conducive to reforms. Does the politics of Europe worry you?
What would worry me is if coalitions or minority governments were to lead to paralysis in the economic decision-making processes . We are seeing some signs of that in the UK. In Germany, the difficulty in forming a coalition is slowing down the process of taking decisions. It is most likely that the outcome of the elections in Italy will be a coalition, whose nature I do not know. If it reduced the ability to fix the roof because of an agenda that is politically-driven, that could be an issue, yes.
You mentioned NPLs, a very delicate issue in Italy, where there is a lot of resistance to new rules proposed by the ECB and the belief that one should not force the pace of the reduction of NPLs.
We take the view that addressing the NPL issue is critically important. It's doable, including in a country such as Greece, which is reducing the NPLs. The ECB is on the same page as us. All those who want financial stability know that cleaning up the system is a necessary objective. Clearly, it has to be done at a sensible pace, but at some point you have to forcefully address the issue. And we have been saying this for a long time, by the way.
One of the proposals being floated in Europe is the creation of a European Monetary Fund. Will the IMF, which until now some of its members accused to be too involved in Europe, be sidelined in European matters. The Europeans seem to be uncomfortable with your presence.
First of all, the IMF gets involved when a country asks us. We do not impose ourselves and always cooperate with regional institutions, be it in the Middle East, or in Asia, or in Europe. There need not be competition between the European institutions and the IMF. We are a bit like the emergency-room doctor: we are called in when the patient is not doing well, the economy is in real difficulty. But we are also, and want to be more of, the family doctor. All countries participate in annual evaluations – economic health check-ups. We are here to help and happy to cooperate under precise rules, trying to guarantee total independence of judgment, independent of political views.
However, Greece is a case in point. You disagree with the European institutions and your position is in limbo, ahead of the end of the program next summer.
I would not say it is in limbo. We have a very clear position: under specific assumptions, the Board of the IMF approved the Stand-by Agreement “in principle”. And the main assumption is that debt restructuring is needed for Greece's economic future to be sustainable. The staff review that just finished identified a series of actions and benchmarks that will have to be fulfilled. We need to address them in order to move forward. And I anticipate that this may happen early in the new year.
The IMF is a pillar of an international order which has served the world economy well since WW2, but this order is now under threat, not least by the stance of the new US Administration, on trade, but not only.
The multilateral system has evolved over time but is needed more than ever. Its mission to improve financial stability and promote economic prosperity has not disappeared. The vision of our founding fathers, that the world would be a better and safer place if there is debate and dialogue between countries, rather than wars, is still very much alive. The IMF itself has evolved: it is no longer setting exchange rates; we have a very different toolkit of programs to offer to countries; and our services, including technical assistance, are in high demand in many corners of the world. It is important to adjust and adapt. But it has always happened.
The new US Administration is challenging the established order.
The US is our largest shareholder, it has a veto right, and it can participate actively in framing so many policies that have been helpful. I have not heard anyone, including President Trump, with whom I have by now had several contacts, deny the value of the IMF. Recently, the President of Vietnam asked me to participate in the APEC summit with 21 leaders, including President Putin, President Trump, President Xi, and Prime Minister Abe, to discuss at length the state of the world economy.
Over the past several years, but especially under your leadership, the IMF has adapted its position on some issues. It used to be dubbed “It's Mostly Fiscal” but it has pushed the G-20 for an activist fiscal stance after the global crisis and recognized the impact of austerity on growth. It is also tackling issues which were not traditionally its domain, like inequality, which is one of the causes of rising populism and the rejection of globalization, and like the role of gender in the creation of prosperity, a theme which has seen you as one of the strongest proponents.
I regard fiscal and monetary policy as tools, not an end in themselves. They can be used to restore macroeconomic stability, which is necessary for the flow of investment, the creation of jobs and the improvement of people's living conditions and incomes. But those tools can also be applied to other elements, which are critical for the macroeconomic situation, such as inequality, which has a bearing on sustainable growth; and climate change, which can ultimately have a devastating impact on economies, particularly low-income countries. Fiscal rules can also shape a better contribution of women to the economy. So, we are not moving away from our traditional focus, but simply putting the spotlight on other aspects that maybe we had looked at from a structural reform point of view, but not made them a central part of what we do. We are also more attentive to the social impact of our actions, for instance to the implementation of social safety nets.
Will this help in the public debate, where there is rising populism and a growing rejection of globalization?
International trade and the transformation of our economies will continue, but these have to be seen from the point of view of both the people that are the beneficiaries and those affected negatively by them. We need the right policies to take this into account. We cannot discuss trade or globalization on a grand scale, we have to look at where the benefits and the losses are falling and how we can better help and equip people.
Do you feel the new stance of the Fund on fiscal policy has helped move the focus away from austerity in Europe?
There has been austerity. But frankly the discussion on austerity has also been used as a cover-up for not tackling other issues, such as structural reforms. There were countries that were not consolidating at all and were claiming that austerity was terrible. So, one should stick to the facts and analyze the numbers and look at the distributional impact of economic policies, and not take a propaganda approach. We have also always said that all fiscal policy should be growth-friendly and that countries that have fiscal space should use it for investment in education, infrastructure, digitalization. This would be good for the country and good for the region. But where there is no fiscal space and the debt is high, there has to be a commitment to reduce debt and therefore to adopt fiscal rules that lead to that outcome.
Are you referring to Italy?
I think the country should do this. Growth is expected to be at 1.6% this year and a little less next year. This is a level of growth Italy has not had since 2010. So now it's time to fix the roof. It should consolidate at an appropriate pace to put the economy on a clear trend of debt reduction and do the structural reform that would be helpful.
You broke the gender glass ceiling as the first woman to head the IMF. Will the next managing director break another barrier, as the first non-European?
I hope the decision is taken on merit. But I have a bias towards another woman!
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