WASHINGTON, D.C.: International Monetary Fund (IMF) chief Christine Lagarde says that Britain’s vote to quit the European Union has injected significant uncertainty into the global economy but is nevertheless unlikely to cause a world recession.
But in an exclusive interview with Agence France-Presse, she also said that Brexit underscores the need for the EU to better explain how it benefits Europeans, amid “disenchantment” with the institution.
And she said that Britain’s move to cut corporate taxes to counter the expected economic fallout from Brexit was just a “race to the bottom” that could hurt everyone.
Two weeks after the British referendum on cutting its EU ties, Lagarde, speaking in her Washington offices at the launch of her second five-year term as IMF managing director, called the event a “major downside risk” for the world.
We don’t think that a global recession is very likely. The immediate effects will be on the UK,” with some spillover into the euro area, she said.
Yet the longer the withdrawal process remains unclear, the worse the effects could be.
“The key word about this Brexit affair is uncertainty and the longer the uncertainty, the higher the risk,” she said.
“The sooner they can resolve their timeline and the terms of their departure the better for all. It needs to be predictable, as soon as possible.”
Lagarde, who as IMF managing director has already endured five years of grinding turmoil in Europe, said she remained positive over the outcome.
“My optimistic approach of life tells me that Brexit could be a catalyst that could push the EU to deepen its economic integration.”
Lagarde, 60, presided over possibly one of the most challenging periods for the global crisis lender, dealing with the Fund’s largest ever rescue operation, for Greece, and simultaneous bailouts of three other eurozone countries: Ireland, Portugal and Cyprus.
It made the IMF a central player in saving the euro area itself, a job still incomplete and with plenty of perils ahead.
Even so, Lagarde, who was France’s finance minister before moving to the IMF in July 2011, has signed on for another term, embracing the challenges ahead, including proving that the Fund is more attentive to those who suffer from its policies.
She admitted that the bailout of Greece, now in its third rescue program after the first two failed, has made the IMF a “convenient scapegoat” for the ongoing crisis.
The Fund is accused of worsening the country’s troubles by insisting on fiscal consolidation—deep government spending cuts and austerity reforms.
With the Greek economy still contracting this year, she said the Fund has to examine whether or not its demands were overly excessive.
Yet a reassessment would not radically change the IMF’s key job, which sees it rescuing governments that have run aground financially but only in exchange for reforms designed to make them stronger in the future.
“In every story, there has to be a bad cop, but I just hope that this bad cop has also a human dimension,” she said.
Yet, as the march of globalization takes a toll on the most vulnerable people, the IMF needs to take account of that, she said.
“Globalization has done a lot of good and has lifted a lot of people out of poverty. But equally it has produced some losers.”
“The losers have to be helped and the IMF will continue to pay more attention to issues like excessive inequalities, women’s empowerment, climate change, and corruption, in order to produce a decent globalization, one that not only increases the overall GDP but that also looks after those who are at risk of losing.”
“That’s how I want to see the IMF evolve in the next five years.”
As for Europe, Lagarde had shown dismay before the June 23 referendum over the possibility of Britain breaking away. It just shows that the European Union must work harder to prove itself, she said.
“The EU has to do a lot more to explain what it does, what it means for people, what the cost/benefits are in a much more transparent manner.”
“The overall European architecture is complicated and any means to clarify and explain it would be critical.”
“At the same time, member states should avoid blaming the EU for everything that goes wrong. I’ve seen it myself and I might have been guilty of doing it too.”