Christine Lagarde, managing director of the International Monetary Fund (“IMF”), warned of problems in the global economy in a speech given shortly before the IMF’s April meeting in Washington, D.C. In her speech, she divided the global economy into three parts: emerging market countries with solid economic growth (primarily Latin American and Asian countries); developed countries that are struggling, such as Japan and much of the European Union; and developed countries that have problems but are improving, such as Sweden and the U.S.
The clashing economic trajectories of the three groups have the potential to cause imbalances in the financial system. Low interest rates in developed countries are meant to spur domestic growth, but they have also caused emerging markets to take on more debt and greater exposure to foreign currencies.
Lagarde also drew attention to the serious situation Japan faces with its public debt being almost two and a half times as large as its gross domestic product. With respect to the U.S., she believes that quantitative easing has a key role to play, but urged policymakers to focus more on fiscal policy than monetary policy. Specifically, she regards the spending cuts imposed by the “sequester” as ill-advised, but also views the U.S.’s key challenge as tackling its ever-growing national debt.