Sunday 28 August 2011

Jackson Hole: IMF Lagarde talking to Europe

After a period of writing about competitiveness from different angles including ICT prowess, I turned to the economic crisis in the eurozone. My later blog entries can be found through the post Eurozone: Whatever is needed, except...

Jackson Hole

This morning we return almost full circle. We look at the themes of competitiveness and technological advance (including Europe 2020 and the Digital Agenda) through the eyes of the guardians of monetary policy. What do the central bankers have to say to their neighbours, the politicians responsible for economic policy, about the preconditions for economic growth?

The annual Jackson Hole retreat of central bankers, policymakers and academics offers some clues.

Earlier today, I presented two speeches in the blog post (in Swedish) USA och Europa: Bernanke och Trichet i Jackson Hole.

I might as well link directly to the addresses:

Chairman Ben S. Bernanke, at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, August 26, 2011: The Near- and Longer-Term Prospects for the U.S. Economy

The chairman of the European Central Bank (ECB) Jean Claude Trichet:

Setting priorities for long-term growth; Jackson Hole, U.S.A., 27 August 2011

Some (other) speeches at the Federal Reserve Bank of Kansas City Economic policy symposium in Jackson Hole, Wyoming, 25 to 27 August 2011 can be found here.

IMF Lagarde

The fresh managing director of the International Monetary Fund (IMF) Christine Lagarde spoke on the same panel as Trichet: Setting policy priorities for long-run growth. Her address can be found on the IMF web pages:

"Global Risks Are Rising, But There Is a Path to Recovery": Remarks at Jackson Hole; by Christine Lagarde, Managing Director, International Monetary Fund, Jackson Hole, August 27, 2011

According to Lagarde, the downside risks to the global economy are increasing:

Developments this summer have indicated that we are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed. So we must act now. It is a matter of vision, courage and timing. Decisive action will bolster the confidence that is required to restore and rebalance global growth.

Turning to the needed policies, Lagarde named the challenges:

Put simply, while fiscal consolidation remains an imperative, macroeconomic policies must support growth. Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery.

She proceeded to talk in fairly broad terms about Europe, the United States, the global dimension and conclusions.


Parochially, I opt for the section on Europe. Lagarde sent three key signals to European policy makers:

First, sovereign finances need to be sustainable. Such a strategy means more fiscal action and more financing. It does not necessarily mean drastic upfront belt-tightening—if countries address long-term fiscal risks like rising pension costs or healthcare spending, they will have more space in the short run to support growth and jobs. But without a credible financing path, fiscal adjustment will be doomed to fail. After all, deciding on a deficit path is one thing, getting the money to finance it is another. Sufficient financing can come from the private or official sector—including continued support from the ECB, with full backup of the euro area members.

Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.

Third, Europe needs a common vision for its future. The current economic turmoil has exposed some serious flaws in the architecture of the eurozone, flaws that threaten the sustainability of the entire project. In such an atmosphere, there is no room for ambivalence about its future direction. An unclear or confused message will add to market uncertainty and magnify the eurozone’s economic tensions. So Europe must recommit credibly to a common vision, and it needs to be built on solid foundations—including, for example, fiscal rules that actually work.

Sustainable public finances, but not at breakneck speed, seems to be the message.

Update 28 August 2011 about 15 EET: I left it to readers to find Lagarde's messages. However, could not resist pointing out the greetings that Europe (= the eurozone) needs solid foundations, such as fiscal rules that actually work. What do you think she means?


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Ralf Grahn

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