IMF’s Lagarde indirectly cautioned Eurozone on deflation

IMF Managing Director, Christine Lagarde spoke yesterday at the National Press Club in the U.S. capital. (IMF photographic library, 15/1/2014).

Weak growth is threatened by deflation in the developed world, while emerging markets have to overcome the financial turbulences that lie ahead, due to forthcoming restrictive monetary policy by the US central bank, the Fed. This is what IMF Managing Director Christine Lagarde said yesterday, speaking at the National Press Club in the U.S. capital. She warned then that “central banks should return to more conventional monetary policies only when robust growth is firmly rooted”.

In detail IMF estimates that,
*Global momentum strengthened in late 2013, set for further gains in 2014
*Big priority in 2014 is for policymakers to fortify feeble global recovery
*World could create lots more jobs before needing to worry about inflation

With inflation running below many central bank targets, there are rising risks of deflation, which could prove disastrous for the recovery. “If inflation is the genie, then deflation is the ogre that must be fought decisively,” Lagarde said. Given that Eurozone is the only advanced economy threatened by deflation, those comments are obviously targeted to Europe, but Lagarde didn’t want to be more direct because of the differences between Washington on the one hand and Brussels and Berlin on the other. The US and IMF believe that Germany is not doing what it can to help euro area and the world to start growing again.

Growth perspective

On growth, Lagarde characteristically observed that “the world could create a lot more jobs before we would need to worry about the global inflation genie coming out of its bottle.” For the euro area the IMF sees a difficult transition from recession to growth. IMF boss noted that the euro area is just turning the corner from recession to recovery and she added “growth is still unbalanced, and unemployment is still worryingly high. Governments should accelerate reforms to boost labour market participation and enhance competitiveness”.

Overall, for the world, Lagarde stressed that “Optimism is in the air, but conditions point to the need to stay focused on the policies needed for sustainable growth and rewarding jobs”. She set the growth potential for the world economy at 4 per cent and noted that below this ceiling there are no inflation dangers in view, rather the contrary is true. This is a direct ‘advice’ to the major central banks of the world not to hastily change their policies from the currently unconventionally expansive mode into the restrictive part of the spectrum.

At the same time, Lagarde asked emerging markets to “strengthen and implement financial regulation so that they can better manage credit cycles”. Obviously, she meant that the expected change of monetary policy by the American Fed, predicted to lead from the cheap and abundant capital era into money rarity and higher interest rates, could derail many emerging countries. Those economies have to prepare by restricting their reliance on imported capital.

Of course, in such general character evaluation of the global economy, Lagarde couldn’t elaborate further into the difficulties that Eurozone has to face. On top of that, Lagarde in this occasion didn’t want to bring about the fundamental differences that exist between the IMF and Germany, over a possible haircut on the Greek sovereign debt.

Sovereign debt

Today the vast percentage of the Greek debt is held officially by the other Eurozone governments, with Germany holding the largest share. In view of that, the IMF insists that euro area honours its November 2012 promise and cut down those obligations. Berlin, under the miser Germanic economic ideology, now rejects this prospect, and instead proposes indirect ways to reduce the burden on Greece. That is why Germany is now against IMF’s presence in Eurozone, despite the fact that Bundestag was the only euro area Parliament that voted positively for that back in 2010.

In any case, the IMF yesterday appeared a bit more optimistic over the economic prospects of the world’s economy than some months ago. It avoided to elaborate on Eurozone’s problems with deflation, and extended the relevant remarks to a global scale.