The former French finance minister chatted recently in her office about the outlook for central bank withdrawal, lessons learned from Greece and other topics.
To what degree are you disappointed in U.S. leadership on the governance issue and the fact that this is still lingering?
The organization functions. We have been able to significantly increase our resources and our capacity to engage, moving from a little over $300 billion to over a trillion dollars — notwithstanding the fact that the U.S. did not contribute or support that move. We have been able to respond to the demands of the membership. Whenever support was expected, we have delivered. And it is really only on the governance reform . . . that we have been stuck. If anything, it has undermined the position of the one member whose ratification would trigger the governance reform implementation and the quota increase. I think everybody would like to complete the process. Let’s face it. It has been around a long time.
You came in from the French Finance Ministry with a certain perspective on what needed to happen in Europe. Looking back on the European program and criticisms of that and earlier, parallel criticisms of the IMF through the Latin and Asian crises, do you see any clear reform needed in the way these issues are handled?
It is the fate of this organization to be criticized and to be seen as a negative force at the time it prescribes . . . reforms, fiscal consolidations, in consideration for loans. That is what happened in Latin America, in Asia and in Europe. We intervene at a time when no other tools, no other methods, no other political coalition has been able to restore the situation. We come in as the firefighter. We come in as the doctors, if you will. And the prescription we give is resented. That is very much part of our fate.
I have been unbelievably encouraged in my traveling in Asia but also in Latin America at the reaction of some political leaders who have said, ‘Thank goodness the IMF was there to help us rebuild, recapitalize our banking system, consolidate fiscally, reorganize our economy.’ I think that if there is one institution that needs to be judged ex post — and sufficiently ex post that countries have been able to judge the results — it is the IMF.
But there has been research by staff at the IMF — on issues like austerity and debt relief — that seems to suggest that future programs may look different. Has groundwork been laid for a different approach? That you are more likely to call for upfront debt restructuring? Or less likely to press austerity?
I don’t think we are there yet. It is a matter that is under review. The staff is working on several papers . . . and we will reach conclusions at the end of that process. The debt situation in many countries around the world requires an intellectually honest approach. And we are doing that.
And this process could get at the protocols that the fund carries into its crisis analysis?
If there is one thing that certainly I have learned, it is that it is country-specific every time. Greece is different from what we had in Ireland and from Portugal and from Spain and Italy. So to just indicate that it will have to be reviewed differently — you know, Japan and Greece are a hundred percent apart [in their debt to gross domestic product], and yet one has access to markets and one doesn’t.
Let’s phrase it this way: From your time in the corporate world, there are sensitivities to which mistakes you are more willing to make than others.
I would rather not make any.
But to the degree you have to do your risk analysis, is the fund now in a situation where it would rather take the moral hazard risks that were present in Europe — whether lending to countries would encourage them to keep overspending — than take on the risks of too harsh austerity, or that it is more willing to say upfront that a country is insolvent and needs debt relief?
It is a question of spillover effects or systemic consequences. I don’t have any regret about the way we addressed the European crisis, simply because [the euro zone] was built and engineered in such a way that it could not have resisted the systemic consequences that would have resulted from another approach. And I am pleased to see that, maybe a little bit because of what we said and did, a firewall has finally been built. . . .
And there is recognition that if that firewall is not big enough, it should be increased. If we had prescribed anything different at the time, I think we could have had serious problems.
People have commented that since the European Central Bank announced programs that seem to keep the euro zone intact, other reforms seem to have slowed down. What’s your diagnosis of this? Is it the politics of the moment? Or is there a more fundamental schism involved — north-south, Hollande-Merkel, however you want to characterize the poles — that probably means slow progress?
The crisis has reinforced their common determination to hang in there together. Only a year ago, there was a sense that the euro zone would break up into pieces, that there would at best be northern euro zone, southern euro zone. There was a sense that Greece might be out of the game, and why not others? That has completely changed. . . . They have built a lot. They have done lots of things that would have been considered impossible three years ago. But they still have a lot of work to do.
But are you worried that they are stuck? No one is saying we should not have a euro. But neither are many saying they are all in with Brussels, let’s finish the process. There seems to be a middle ground that is not the efficient monetary union we’ve been discussing for three years.
At least we have a European Central Bank, which has done an awful lot to keep the thing together. It created space for [European leaders] to strengthen the architecture of the euro zone.
Aren’t you worried that this process is losing momentum?
Every time the crisis moves away, every time the urgency abates, the energy and the drive to reform and to rebuild wanes a little bit. That is the history of the European construction.
That being said, all of these reforms — you can have acute crisis and you can have chronic ones, and it seems that they have traded acute crisis for chronic ones of low growth and less job opportunity.
Which I don’t think is bearable for the long term. Which is why also it is comforting to see that Germany, for instance, is looking at stimulating its economy, not increasing taxes going forward, and participating in the growth and jobs debate in a proactive fashion.
What about the other contenders here — France, Italy, Spain? What is holding them up from finishing the reforms that are needed?
I think confidence is a big factor. I am not going to comment on France, but if you look at some of the other countries, they have done an awful lot to do fiscal consolidation. Italy was in primary surplus, and both of them have restructured their labor markets despite entrenched interests and sort of strong cultural trends. Yet reforms have begun. They have both restructured and strengthened the financial market.
Since you did the last report on the U.S., it seems like Fed Chairman Ben S. Bernanke declared the end of the era. What dynamic is this unleashing? What concerns do you harbor about this unwinding that is going to occur over the next years? Is there high-frequency data you have started to monitor?
We have teams whose job it is to look at high-frequency indices. I don’t want to be riveted to what happens on a daily basis. They alert me if things are heading in the wrong direction.
What we see is that in quite a few of these emerging-market economies, measures have been taken, the market has deepened, issuance of bonds has varied, including in local currencies. And I think that some of them — not all of them — have strengthened their fundamentals to such an extent that I don’t think they would be the victims of reasonable, well-programmed, well-communicated unwinding of the super accommodative monetary policy of the central banks.
Number two, we have significantly reviewed, explored, debated and finally revised our position on capital flows and the management of capital flows. And we certainly think that countries which, once they have exhausted the various macroprudential policies, that they can resort to some capital flow management. We still think that the unwinding has to take place in an articulated way, with proper transitioning, not abruptly. And when I say well articulated — taking into account the potential spillover effects to other markets, not just the domestic consequences.
People have said these years of accommodation have left the world economy . . .
Withdrawal is always painful.
If it is gradual, if it is properly announced and at the same time other policymakers make the right decisions on fiscal, growth and structural measures — that they take the baton from the central bankers — it should work.