The International Monetary Fund and World Bank are holding their annual spring meetings in Washington, D.C., April 11-13 amid a strengthening global economy but weak growth in the eurozone and financial volatility in emerging markets. USA TODAY economics reporter Paul Davidson spoke with IMF First Deputy Managing Director David Lipton, the fund's second highest ranking official after Managing Director Christine Lagarde about some of the key issues.
Q: How serious is the low inflation problem in the eurozone?
A: Their target is to have inflation a little below 2 (percent), and now it's a little below 1. Our concern is we would hate to see the European economies stuck in a low-inflation, low-growth trap. So we're just suggesting that in essence they achieve their stated goal and warning that too much delay in taking action to achieve that goal runs the risk that Europe could get stuck in low inflation.
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Q: Of the unconventional steps that the European Central Bank could take to jolt the economy, do you recommend quantitative easing (ECB bond purchases to lower interest rates) or other measures?
A: It's fair to say that … they should explore some form of quantitative easing consistent with their rules and regulations because of the size of the problem.
Q: Isn't quantitative easing challenging for the ECB because the euro zone has 18 separate bond markets? How would they decide which ones to buy?
A: It's true the situation is certainly more complex. Because these are different countries, they have different economies, different inflation rates. There are many considerations. We're not giving a detailed recipe but rather an overall prescription.
Q: Last year, after Federal Reserve officials discussed their intent to wind down their bond-buying, U.S. interest rates rose, making investments in emerging markets like Brazil and Turkey less attractive and prompting a flight of foreign capital from those countries. You've called for more communication by the U.S. and other top central banks with their emerging market counterparts. But the larger economies say they have to worry about their national responsibilities. How do you respond?
A: We're not suggesting that any central bank operate in a way that's not consistent with their mandate. But we believe that communication is important, cooperation is important, that any central bank should explain to other affected central banks that might experience spillovers as clearly as they can what their policies are, so they can anticipate what's coming. So those central banks can explain to the Fed what they think the impact will be on them. Because the (emerging market) countries are big enough now that if there were, say, a negative effect on (their) growth it would spill back and affect the United States. So we try to encourage that kind of dialogue at the kinds of meetings we're having this week.
Q: The U.S. Congress for several years has failed to approve IMF governance changes that would give emerging markets more voting power within the fund consistent with their faster-growing economies. The IMF has strongly urged Congress to act, but the changes would increase the emerging market's voting authority modestly to 44.7% from 42.1%. So why is this important?
A: (Emerging markets) believe in the future that growth differential will continue, so it's partly about catch-up — they feel their growth hasn't kept up with their growing importance. If you were an emerging market country and you believed this system would never change it would be hard to have faith in the legitimacy of the institution. It may make you hesitant to want to continue to participate. Any calculation that any economist makes of the future is going to show that China's size in the global economy is going to continue to change. So if you were China you would care a lot about whether you're going to get your fair share.
