ITV News' Julie Etchingham asks the International Monetary Fund chief Christine Lagarde if the Government should have put growth measures in place earlier and whether Greece's exit out of the Eurozone could have an impact on Britain. Read the full interview below:
When we met in January you stood behind the government’s Plan A. Now you suggest there may need to be room for tax cuts and measures to shield the poor. That’s Plan B isn’t it?
It’s more complicated than that. What we are saying in the course of this annual review that we do for the UK is the fiscal consolidation path and course that has been taken…
Yes, you can call it the cuts, it’s reducing the deficit. This government came into power with a deficit of 11% and has reduced that deficit significantly over the course of the last 2.5 years. Very heavily to begin with and as growth slowed and as the situation became more complicated the deficit cutting has been slowed as a result of the system itself being more flexible.
We regard that in the current economic situation as appropriate because the Bank of England in particular has also adopted some monetary policies that have made financing easier.
Our recommendation is that monetary policy be continued so that financing be continued or resumed if you will because financing is easier for SME’s – they are the ones who create jobs, for households – they are the ones who buy and sell houses.
As a second line of defence, the government budget be used to also help with the financing because the Treasury today borrows at its lowest interest rate as ever for the last eight hundred years and that has to be made available to the people.
And quickly, in your view? And is it a judgment now that the government should have acted sooner on putting money into SMEs and helping to shield the poor?
I think the UK government has already begun doing that, providing financing to SMEs, helping households with reduced and cheaper financing.
It has to continue doing that and probably it has to accelerate the movement. Because that’s what’s needed. Enterprises have to be able to finance the investment and if they do so they will be able to create jobs and that is what is really very badly needed. I think it is encouraged by the way.
This two fold approach – the monetary easing on one hand, the use of the government balance sheet. This is facilitated by the latest inflation number, which is lower.
You say it needs to act now?
Monetary policy and the use of the government balance sheet to facilitate financing – yes absolutely. And if the situation was clearly below target, then at that point in time, fiscal easing should be considered.
Should they have put growth measures in place earlier?
It’s very difficult to re-write history but in hindsight I’m also weighing that against what would have happened if they had not decided to cut the deficit. To move from this -11% to now -8%.
You have to compare that against other countries which experienced severe deficit numbers, did not take action right away and are now facing very, very stressful financing terms that is putting their situation in jeopardy.
Do you agree with David Cameron’s assessment that the June 17th election is an in or out referendum on the Euro?
As is always the case with political elections is it’s always going to be more complicated than that.
What I see as encouraging is 1) that the Greek population apparently wants to stay in the Eurozone 2) that the political leaders of Europe want to keep Greece within the Euro.
There is one missing component here. Which is that it has a price for the participation in the Eurozone. That price is improved productivity of the workforce; it’s structural reforms; it is fiscal consolidation when a country runs at such a high deficit; it is at some stage,a return to the financial markets to finance its debts. And those measures haveto be taken.
You warned of a potentially messy exit for Greece. We know the politics of the situation is incredibly finely balanced. The far left could reject the austerity measures, how perilous is this stage? How big a crisis is this?
It is a complicated moment. Because of the hostility towards austerity and the lack of understanding that austerity doesn’t stand alone, it has to stand together with growth enhancing measures.
We have been recommending, to Greece in particular, those structural reforms that will in turn deliver growth. Those structural reforms have to take place. Some of them have been voted, not yet implemented.
Others need to be voted. That path has to be embarked upon, resolutely and with courage on the part of the political leaders that will lead that country if it wants to lead it within the Eurozone.
If it rejects it and we see Greece tumble out of the Eurozone, what would it mean for Britain?
Well the UK is clearly outside the Eurozone but obviously linked very strongly to the Eurozone by trade because it trades a lot with members of the zone and any difficulties, disruption would clearly have an effect via the trade channel.
It is also very linked to other Euro players through the banking and financial sector which is very strong in the UK and has ramifications throughout Europe.
So those would be the two channels of potential contamination and certainly disruption that would apply to the UK.
And is the Prime Minister right to issue an ultimatum to Greece to decide whether it’s in or out?
I wish it were as simple as that. In or out. It’s going to be a combination of the political endorsement, the willingness of the population to continue to implement, the policy mix that has to be put in place, fiscal consolidation, deficit cutting, better financing terms which have already been made extremely favourable to Greece and those structural reforms without which nothing is going to serve that country in the long term.
Did the Prime Minister simplify it too far?
Well at the end of the day he is right – you are in or you are out. But the process is itself a fairly complicated process. Which includes the steps I have mentioned.
Add it to the political determination and courage, the support of the population and all of that is only based on the understanding of what the situation is currently, can be – with programmes in place and support within the zone, and what it could be if there was no such thing as implementation, support within the zone and the hazards associated with it.
Do you back the idea of Eurobonds to spread the debt around the Eurozone? It puts Angela Merkel in a difficult position…
Understandably so because the country that would carry the burden would be countries such as Germany and it’s certainly understandable, that Germany would want to receive in consideration for that sharing of liability, significant commitment to improve productivity to structural reforms so it does not continuously carry the weight of the entire zone.
So I think you need to distinguish between the project bonds that call for collective financing of a Euro nature with the overall Eurobond which I think would be appropriate with proper considerations as well. They have to be realistic and feasible.
So you would advise your friend Angela Merkel to go for this notion?
I would encourage her to play her cards. Because there is work to be done. There are structural reforms that must be implemented in all Eurozone countries.
That’s the bargaining that certainly could be used by some of the member states to say ‘please conduct your reforms appropriately and once that’s done we can consider the sharing of the European debt.
Do you think this is the end of the euro project dream?
I don’t think an individual or individual carriers could be weighed against the incredible achievement of the European Union and of the Eurozone to a certain extent.
Those are not just carrier projects, they are life-long projects that intended to put an end to this fragmented Europe that gave rise to horrible conflicts in the last century. That project clearly transcends some of the economic turmoil we are facing at the moment.
We’ve talking about the abyss for the last eighteen months or so. There are always along the line, steps that have to be taken, that have been taken in the past. I have faith that the Europeans will be up to this moment of huge challenge thrown at them by current circumstances.
Do you look at French politics, given what’s happened in the last couple of weeks, and have a desire to work in the French political sphere?
I look at the whole Eurozone and the EU and I have clearly a special attention to my home country but I see it as very much part of a currency zone that is strengthening, getting better governance, getting better firewalls, and continues to do so.