In her first major speech of the new year, International Monetary Fund chief Christine Lagarde on Thursday called for “all sides to pull together” in Washington to solve the country’s debt and growth problems, saying the world’s leading economies must follow through on fiscal and market reforms to avoid slipping back into recession.
“My sense is that we have stopped the collapse,” she told reporters at IMF headquarters in the District. “We should avoid the relapse, and we cannot relax.”
The Obama administration and Congress avoided the “fiscal cliff” a couple of weeks ago with a short-term deal, but both sides still have to negotiate a new debt-ceiling increase and deficit-reduction plans for the long term.
She called for U.S. lawmakers to take a bipartisan approach by both raising the debt ceiling in a timely manner and agreeing to a debt-reduction plan for the medium term.
“We think that all sides should pull together in the national interest, avoiding further avoidable policy mistakes,” she warned.
As ways to reduce the deficit, Ms. Lagarde suggested spending cuts and entitlement reform but did not mention higher taxes.
“Spending cuts are necessary, it’s obvious,” she said, while cautioning against cutting spending too far and too fast. “They should be anchored in the medium term. They should be sufficiently funded so as to remove the uncertainty around them. They should clearly touch on entitlement.”
This constant political battle in Washington has caused much uncertainty for the business community and financial markets. Ms. Lagarde called for leaders to “put the uncertainty to rest.”
“Removing uncertainty plays a key role in rejuvenating confidence,” she added. “Putting away uncertainty by following through on policies is important from our perspective.”
As for Europe, Ms. Lagarde offered a rare bit of encouraging news about the European Union’s efforts to stave off financial collapse, shore up the union and stabilize problem economies such as Greece. She said recent reforms appear to have bolstered investor confidence more than past such efforts.
“This time it’s different,” the French lawyer-politician said, as she called for more monetary easing “in order to sustain demand.”
Ms. Lagarde was also critical of global jobless numbers. She pointed out that more than 200 million people are unemployed around the world, and 2 in 5 of unemployed people are younger than 24.
“The crisis has been in the making for many years now, and what we are seeing is improvements on certain fronts, but deterioration and certainly no improvement on the employment front,” she said.
Ms. Lagarde expressed disappointment in recent trends in the financial regulatory sector. Now, several years removed from the worst of the crisis, she said it is taking too long to implement reforms.
“We recognize that there has been progress, but the progress has been very time consuming and continues to contribute to uncertainty,” she said, adding that she is discouraged by the lack of commitment from regulators to follow through on the new rules.