May 19, 2011 12:17 PM EDT
Good morning. I am grateful for the opportunity to address such a distinguished audience today, but I deeply regret the circumstances that have made it necessary for me to substitute for the Fund’s Managing Director.
For nearly three decades, the Bretton Woods Committee has played an invaluable role in supporting the work of the IMF and of other international institutions. With the Bretton Woods institutions adapting to meet new global realities, your efforts to promote understanding of our mandate and our work remain essential for us to be effective. You also provide valued feedback and commentary on how we can better fulfill our unique global role.
Today, I’d like to focus on how we can build a stronger global economy. My principal point is straightforward: The prospective contribution of greater policy cooperation in enhancing systemic stability and in preventing crises—and in containing their costs when they occur—is more important today than ever.
Supporting this cooperation lies at the heart of the IMF’s mandate. In the wake of the crisis, we undertook important reforms to our surveillance and lending tools. But as the world continues to change, we must do so as well.
In particular, I will focus my remarks today on the steps we are taking to enhance the framework for our unique surveillance activities. For example, we are seeking to deepen our understanding of the complex and growing interlinkages across the world, with an emphasis on the drivers of capital flows. We also are looking to sharpen our awareness of the quality of growth within countries—including such considerations as income distribution and unemployment—and its relation to macroeconomic stability.
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As part of our efforts to enhance systemic stability, we are examining how the global financial safety net can be made more effective. We’ve made progress since the crisis hit in force in 2008. Nonetheless, we are far from the point where countries can be confident that they will have secure access to international liquidity at times of systemic crises. At the same time, we have to remain alert to the need to create proper incentives in designing safety net tools, in order to insure that the results of our efforts aren’t paradoxical.
Before explaining the strategic changes currently underway at the IMF in greater detail, let me briefly outline the economic backdrop against which they are taking place.
A strengthening, yet fragile recovery
Overall, the global recovery is gaining strength. But it remains fragile and uneven, and beset by uncertainties. So there is no room for complacency in dealing with the challenges that still threaten the recovery. These challenges fall into two camps.
First, countries are still dealing with the aftermath of the crisis.
In the financial sector, substantial progress has been made already to re-build buffers and strengthen regulation. But the work is far from over, especially when it comes to supervision and cross-border resolution. Fiscal reform is another pressing issue. At the end of 2010, government debt was as much as 25-30 percentage points of GDP above the pre-crisis level for several advanced economies—and is projected to continue rising, in the absence of bold measures to rein it in. Credible solutions will be required for the serious fiscal challenges facing many advanced economies, notably in the European periphery, but also in the United States and Japan.
Turning to Europe, several peripheral euro area countries today remain in critical situations. And there is no easy solution. Without any doubt, the primary responsibility for restoring their economic health lies with the peripheral countries themselves. Difficult and demanding measures will be required in order to avoid an even more serious crisis and to restore economic health. At the same time, there are compelling reasons for their European neighbors and the global community—operating through the IMF—to support these countries’ reform efforts. The only viable option for Europe today is a solution that is comprehensive and consistent—and that is also cooperative and shared. Such a solution inevitably will include: (i) strengthening area-wide crisis management frameworks; (ii) accelerating financial sector repair; (iii) improving fiscal and macroeconomic coordination; and (iv) promoting high-quality growth.
For our part, the IMF is supporting our European members as they seek to put their economies back on a sustainable footing. Last week, we agreed on a joint IMF-EU financing package for Portugal worth €78 billion, aimed at reigniting growth and employment. This week, we completed the first and second reviews of Ireland’s program. And in Greece, a mission is currently in the field, working closely with the authorities to identify the policies needed to underpin the adjustment program going forward.
The second challenge to the global recovery reflects its unevenness.
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