International Monetary Fund Managing Director Christine Lagarde on Tuesday turned up the volume on her calls for stronger action by the world’s economies to boost growth, warning that downside risks were increasing without decisive action.
In a speech at Frankfurt’s Goethe University, Lagarde prescribed specific moves, including for the United States to raise its minimum wage, for Europe to improve job training and for emerging economies to cut fuel subsidies and boost social spending.
She said recovery from the 2007-2009 global financial crisis “remains too slow, too fragile and risks to its durability are increasing.”
“Let me be clear: we are on alert, not alarm. There has been a loss of growth momentum,” Lagarde said in her prepared remarks.
“However, if policymakers can confront the challenges and act together, the positive effects on global confidence – and the global economy – will be substantial.”
Her remarks come less than two weeks before senior ministers, central bankers and other policymakers from the Fund’s 188 member countries gather in Washington for the IMF and World Bank Spring Meetings to assess the health of the world economy.
While the U.S. recovery has been gaining momentum and some emerging markets such as Mexico have performed well, the IMF has warned that growth in Europe and Japan has been a major disappointment, while China’s slowing growth has hurt oil and commodity exporting countries, including Brazil and Russia. In the latest update to its Global Financial Stability Report Monday, it warned that volatility in China is an increasing threat to the world financial system, given how large and interconnected with the rest of the world economy it is.
To counteract those headwinds, Lagarde called for accelerating structural economic reforms, increased fiscal support and continued accommodative monetary policy.
For the first time, she prescribed some specific policy actions in these areas.
A higher minimum wage, expanded tax credits for the working poor and improved family leave benefits – changes championed by President Barack Obama and Democratic Party presidential candidates – could help increase the U.S. labor force, she said.
Republican lawmakers who control the U.S. Congress, however, have blocked these proposals from advancing.
Lagarde said Euro area countries should implement better training and employment-matching policies to help reduce unemployment for young people.
She also called for better tax incentives to encourage research and development investments and more public spending in this area, citing IMF research showing that a 40 percent increase in R&D spending in advanced economies could yield a 5 percent increase in GDP over 20 years.
With current spending low, this would entail a small fiscal cost of about 0.4 percent of GDP per year, she added.
Countries with high and growing debts and elevated borrowing costs should pursue further fiscal consolidation, Lagarde said.
But her remarks did not mention negotiations between the IMF, European lenders and Greece for a new bailout program for the heavily indebted country.
Over the weekend, after Internet whistle-blowing site Wikileaks published an apparent transcript of a controversial IMF conference call, Lagarde denied that IMF staff might threaten to pull out of the Greek bailout as a negotiating tactic to force more European debt relief for Greece.
