Christine Lagarde HARDtalk

Many others were rebel fighters. Those are the latest headlines. It

Welcome to a special edition of HARDtalk from the headquarters of

the International Monetary Fund in Washington, DC. The IMF it that the

centre of efforts to revitalise the financial world economy. Today I am

joined by an audience of delegates to the annual spring meetings of

the IMF and by my special guest, the managing director of the IMF,

Christine Lagarde. She says her task is to move the world economy

from a fragmented three-speed position to a full speed world

economy. It is a neat phrase. But how is it to be done? Please give a

warm welcome to Christine Lagarde. Christine Lagarde, let us start

with a broad overview across the world economy today. Do you feel a

sense of deep uncertainty still hangs over the economy? There is

still uncertainty, but there is probably less uncertainty than we

had a few months back. As you mentioned, we have this three-speed

recovery underway. It is essentially the emerging market

economies and the developing countries, which are moving not

full speed ahead but quite fast. They have sustained the crisis

relatively well under coming out of it reasonably solid. We have a

second group of countries, essentially the United States of

America and a few others like Sweden and Switzerland that have

done quite a lot of reforms, particularly in the financial

sector. But they have real issues, particularly the US with fiscal

consolidation. Are they going too fast now? Yes. Are they going

steadily for the future? No. That is an issue. That sounds very

serious. Do not want the good one? I do, but you're not happy with the

economic management of the United States? We believe the fiscal

policies in place are not positioned correctly. We believe at

the moment they are doing too much of it. They are contracting by

about 1.8%. That is the size of grizzly forecast for them. They are

not telling us what they plan for the medium term. Yet we know that

they have massive entitlement weight on the economy that would

require them to decide for the medium term but they are planning.

It is not balanced as it should be. I hope we can get back to that. I

rudely interrupted the third speed. I suspect that when we get to Brit,

it is the most problematic area of the world economy, we are talking

about Europe. We are talking about Europe, particularly the eurozone,

and Japan. It is in a place of its own for all sorts of reasons. It is

Europe and the eurozone in particular that we see in very mild

recession for 2013. It is not picking up fast. That is the

slowest of the three groups. It is the one that needs to pursue

significant reforms as they have begun. I think we have to focus

this conversation on Europe. I want to quote to some words from your

chief economist, who said the world economy is as weak as its weakest

link. Just to be clear about it, you see Europe as the weakest link.

Talking in general terms, yes. This is the weakest link. This point

about week as the weakest link asked to do with how interconnected

we all are. If one player is down and one growth is low, it is going

to have an impact. Let us have a look at the strategy that the Rose

Byrne and other governments in Europe are looking at. Let us talk

about austerity. It has become the focus of so much debate and it

involves the IMF. His austerity going too far? Two points here.

Posterity on its own, fiscal consolidation, the reduction of

deficits, trying to change the trajectory of debt to make it go

down rather than up on its own would not be sufficient. In the

same vein, monetary policy alone would not be sufficient. Structural

reforms on its own would not be sufficient. You need all of them

together. What I am getting is that I am seen signs that the IMF

approach to austerity is evolving. A was coming to that. It is because

the conditions in Europe are in some ways deteriorating. Yes?

coming to that. We are coming out, very gradually, of the worst

possible recession since the Second World War. It is a very complicated

and complex crisis. He to live in Spain, Greece, in a host of

different countries in Europe, you cannot feel you're coming out of a

recession at all. You are not yet coming out of recession, but I want

to narrow down to those countries. Very complex landscape, financial

crisis, real estate crisis. The discussion between the real economy

and the markets. In that context, fiscal consolidation had to take

place. Those deficits had to be reduced. The question that we ask

now and has to be asked is, is it going too fast? Is it going to deep

and is it being efficient? For some countries, it has to slow down. The

pace was too fast. They have room to manoeuvre and let growth pick up

a little bit. I want to mention one other country where it is

controversial, the United Kingdom. Really? Yes. Your own chief

economist is now very specific. He says that it may be time to adjust

the original fiscal consolidation plan of George Osborne, the

Chancellor of the Exchequer in the United Kingdom. He says George

Osborne is playing with fire because conditions have

deteriorated but the policy has not changed. Will you back those words?

I think what is important is the collective wisdom we have tried to

put together. The Department is clearly a very important factor in

our thinking. When we say, collectively, that it may be time,

it should be considered, we certainly have a collective view.

This is cogent, isn't it? You and others have been delivering a

message for some time that a reassessment is needed based on

conditions in the wider economy. One can look at all the figures, UK

downgraded yet again, the economic medicine is not working at the

moment. Is it not time for you to say, enough of this review and

reassessment Procedure. Now you need to shift course. First of all,

I do not think that we have shifted. For the past couple of years we

have been saying that this is a very strong programme. One has to

watch what is the growth, what is the environment, what are the

constraints. We have consistently set out. It is not a new view that

we would be coming up with. I am sure you have seen this. The

Financial Times is now talking about a de stop growing between the

IMF and the British government. -- dust up. They say that they simply

will not do it. They are wrong. did not know about this strange

boy's language. This is not how we operate. The point is there that

you at the IMF and the British government now seem to have a

serious difference on this key issue of how to manage fiscal

consolidation and at the same time revive an economy and get growth

going. We have always had the same line. Countries that have a long

way to go, and Britain came from an 11% deficit, have to conduct fiscal

consolidation consistently. Giving a medium-term objective and giving

reliability and confidence that these policies will be put in place.

The second point, we have also consistently said that clearly one

has to take into account the environment and the growth that

applies to the country. The UK has had some positive growth. It is

forecasting some positive growth next year. With these parameters in

mind, which are exactly what the IMF has an institution together

with its research department think, we do not do bus stop, we do

dialogue with authorities. -- dust up. We are going to sit down before

the review and explore a why this is working. Our export working? Is

the funding for the lending programme that is very put in place

well working and if not why not? We are going to do all that and we're

going to do it in a very even fashion. Not been prejudiced

towards one or the other. Not being supportive of one or the other. We

want to do a good job and give the country a good chance to explain

why they are doing this and why we are recommending this or that.

you do want to see more flexibility from the United Kingdom? We are

saying that with this medium term strong anchoring of fiscal

consolidation, the pace has to be adjusted under the circumstances.

Given the weak growth we have observed lately because of reduced

demand addressed to the economy, now might be the time to consider.

But we want to have the dialogue. I do not think it is fair on any of

our members, we have 188 of them, to pass a final judgement. The

words used to matter. When we say that we may consider, we're opening

the door. But now is the dialogue. Let us focus briefly on Cyprus, the

most recent eurozone bailout. the most difficult as well. Are you

proud of the role the IMF played? You are trying to imply that it was

so difficult I cannot say that I'm proud of what we did. Let me tell

you something, I am proud of the team that actually put Alice and

Alice and Alice, late night days and weekends, trying to help the

country that was in such a difficult position and had really

delayed the curing of the problem by securing a loan that took them

out of the market for a year and a half. Had they done it a bit fovea,

it could not have been as complicated. -- earlier. Am I proud

of it? I am proud of the teams. They have done as good a job as

they could of a very difficult case. I am happy to go into the details.

Let us not spend too long on it. But first, you became, the IMF

became the party to an initial rescue deal that the Cypriot public

absolutely rejected. An initial deal that was going to cost even

small bank depositors a significant amount of money. It seemed to break

a fundamental trust about the security of small savers and

banking deposits. Do you regret that? I regret that we did not

explore sufficiently the find, if you will, between members of

government and the persons who were negotiating on the health of the

country. There would be put down views by the population. Just to

remind ourselves, we're talking about less than one million people.

0.02 % of the eurozone's GDP. A banking sector eight times the size

of the country itself. Massive depositors, including from non-

residents. A restructuring of banks You were a party to it, which

amounts to... To quote one leading European commentator, it drove a

coach and horses through the big idea of banking union, because when

it came down to it, the message to Cyprus was - it is your problem. We

will offer you some money, but you are going to have to bear the brunt

of the pain. We found out after the initial deal it is going to be much

more pain. The Cypriots are facing the most unimaginable burden to pay

off the price of this rescue deal. Just to remind you, all of the

accounts under 100,000 euros are totally protected. Some of the

accounts in one bank are going to take a haircut of about 37%, the

bigger accounts. The other ones are going to go through it a bad bank,

could paint process. Overtime and maturity they will recover some of

their money. My take on it, looking at the future, is that this Cyprus

case, as small as it was, will hope fully convince the Europeans,

particularly the members of the eurozone, that a European banking

union is an absolute necessity and has to be put in place in quickly.

Had there been a banking union in place, the common superviser who is

in charge of not just looking at the big guys, but also supervising

the three largest banks in any of the member states, would have also

seen that there was something funny about this, particularly the

largest banks, growth coming from a relatively small capital. That

would have been won. The second one is that the European system would

have helped in the rescue package and would have directed what was to

be done. A final thought on Europe. You have made the point about

banking union being so important to stabilising the eurozone. We don't

have a full and proper banking union. One person goes further. He

said, in the end, there is no alternative if the euro is to work

but to give birth to the missing ingredient - a European Treasury

with the power to tax and therefore borrow. In the longer term, is he

right? I think he will be gone by then. I might be gone as well. To

have that as a goal, if the people of Europe and the leaders of Europe

have that political objective to turn the currency union into

monetary union, which it is now, into a banking and fiscal union,

into a political union, that is where they should go. Your answer

was neat and amusing, but it raises another question, if it is so far

away and so difficult to achieve, is it the implication that in the

interim the eurozone is always going to be unstable and

dysfunctional? It just means that I will take my retirement early. It

is a complicated structure, there is no question up you have 17

member states. 17 flags. 17 national anthems for 17 treasury

departments. They are deciding to come together to have consistent

fiscal policies and set debt ceilings and so on. Not all of it

works, but in times of smooth sailing, the boat is OK. In times

of Tempest, then you can see that the mast does not hold as well as

it should. That you have to put a little bit of is that and the other

around the vessel. That is what is happening at the moment. They need

to move faster. Let's move offer of Europe and think of other

challenges facing the IMF. I want to talk particularly about one key

study. That is Egypt. Egypt is desperate for assistance from the

IMF, up to the tune of $5 billion. We sea the economy that is in dire

straits. After months of tough and as the Asian, you seem to be a long

way from offering that assistance. -- tough negotiation. Is that

because the IMF is focused on the eurozone, so it is not lending

support to difficult situations like Europe? I can assure you that

is not the case. I was in Egypt in August after the appointment of the

prime minister. I thought it was a very important statement to make to

the Egyptian people and to the Egyptian authorities that we were

paying attention, that we wanted to be in a strong and productive

dialogue with them. And we were on the verge of concluding a programme

in November, 2012, which is by all accounts very fast. I am there in

August, the team works hard if and go in the field spending days and

nights working with the teams, they put a programme in place, but for

political reasons, no criticism of it, but for political reasons the

President and the Prime Minister had to pull out tax reforms that

they were just about to put to the Parliament. What do we do? We go

back. We will return to Egypt. We have had teams on the ground

negotiating over and over again. They just came back a few days ago.

There is still a way to go before we complete the agreement because

two things... People won't know the detail, but to be clear, as I

understand it, there is still a lot of discussion about whether the

Government is prepared, as you want them to be, to curtail on subsidies

for wheat, for fuel, things that the poor in Egypt absolutely depend

on. This gets to the heart of how the IMF handles negotiations like

this. A Pul?I ? this. A Pul economists said the IMF approach is

they call a negotiation, but the fact is all the power is on one

side, the IMF's. Many in emerging economies feel that the way you

operate is secretive, it lacks transparency and accountability,

and it is fundamentally unfair. think it is a fundamentally unfair

comment. Seriously. Because everything that we do it is

approved by a board representing the 188 members of the institution.

It is not as if you have a group of secretive economists corking up

their little thing on the side. It is far more complicated. It is a

constant dialogue. At the end of the day, it is the programme of the

country itself. You remember my point about Cyprus. You need to

have political support. That is one of the things we want to have in

Egypt, which is why we talk with the government, but we also talk

with the opposition. The elections are down the road and in the

meantime we have very few people to talk to that will say, yes we want

to do that. One point on the subsidies because I think it is a

much money spent on subsidies around the world? Two trillion

dollars going to subsidy. If you look in the details of who gets the

subsidies, it is not so much the poor people. The bulk of the

subsidies actually go to people who don't really need it. Those who

really need the subsidies, the poor people, get a little chunk of it.

What we are saying to Egypt is, we design, make sure that the poor

people have what they need by way of cash transfers, by way of

special smart cards that give them access to oil because they need

that as well, and the rest of it, the rest the ghost to those that

are needed, it is OK. There is enormous pressure on you. You have

been described as one of the most powerful women in the world economy,

alongside Angela Merkel, and if you face a real personal difficulty.

Magistrates want to question you about allegations of

misappropriation of public funds and aiding and abetting

falsification. You have already seen your apartment search by the

authorities. This is making it difficult for you to do your job,

is it not? No, it's not. I am trying to focus 100% of my energy,

my enthusiasm, my smile on the job that I have to do. I had the huge

privilege of being supported by a team which is not looking at those

things that you just mentioned. They exist, I will deal of it and I

will do what I have to do. If you are placed under formal

investigation, would your position still be tenable? At the IMF we do

not speculate on personal evolution of things. At the moment I am

telling you this - I am focusing on what I have to do. I hope to have

demonstrated to you that I am passionate about what we do if an