‘A Close-Up Look at Two Regions in Historic Transition: The Euro-Area and the Middle East and North Africa’


David Lipton
First Deputy Managing Director of the International Monetary Fund

1 – 2pm, Tuesday 13th November 2012

Committee Room 10, House of Commons, London SW1A 0AA

To attend please RSVP to: emma.pike@henryjacksonsociety.org 

The global economy has been sluggish, and while there is a path to sustained recovery, prospects are highly uncertain. Against this backdrop, two regions are particularly worthy of attention as they go through historic transitions: the Euro-Area, striving to integrate further to contain a crisis that has come to be seen as a threat to its very viability, and the Middle East and North Africa, where countries that experienced political renewal almost two years ago are wrestling with the economic consequences of the process that provides challenges as well as opportunities. The IMF is actively engaged with both, alongside its broader efforts to promote global economic and financial collaboration.

By kind invitation of Jesse Norman MP, The Henry Jackson Initiative in association with The Official Monetary and Financial Institutions Forum (OMFIF), is delighted to host David Lipton, First Deputy Managing Director of the International Monetary Fund, who will discuss the momentous transition that both the Euro-Area and the Middle East and North Africa are currently going through, and what role can and should be played by international financial institutions in these regions. OMFIF will be represented by Lord Christopher Tugendhat, Former Vice President of the European Commission and a member of the Henry Jackson Initiative Task Force for Inclusive Capitalism.

TIME: 1 – 2pm

DATE: Tuesday 13th November 2012

VENUE: Committee Room 10, House of Commons, London, SW1A 0AA

To attend please RSVP to: emma.pike@henryjacksonsociety.org


Mr. David Lipton was appointed First Deputy Managing Director of the International Monetary Fund on September 1, 2011. Before joining the Fund, he was Special Assistant to the President, and Senior Director for International Economic Affairs at the National Economic Council and National Security Council at the White House. He was a Managing Director at Citi, and also worked at Moore Capital Management and at the Carnegie Endowment for International Peace. Mr. Lipton served in the Clinton Administration at the Treasury Department, and as Assistant Secretary and Under Secretary of the Treasury for International Affairs. Before that, he was a Fellow at the Woodrow Wilson Center of Scholars. From 1989 to 1992, he worked as Economic Advisor to the governments of Russia, Poland and Slovenia. Mr. Lipton began his career with eight years on the IMF staff. He has a Ph.D. and M.A. from Harvard University and a B.A. from Wesleyan University.



Fleur Brading, Director, The Henry Jackson Initiative

Hi, hello everyone. My name’s Fleur Brading, I am the director of the Henry Jackson Initiative – we are hosting the event this morning. We are absolutely delighted by our speaker, and I think the turnout represents his reputation and the subject we’re addressing this morning. I should say the HJI focuses on building a more inclusive capitalism, and we are delighted also that Lord Tugendhat is with us, who was a member of our founding group and did a lot of work with us on the principles and the research that we’re now advancing. So I’ll hand over to Jesse Norman who’s hosting us, and thank you Jesse.

Jesse Norman MP

Well thank you very much indeed Fleur, and thank you ladies and gentlemen. It’s my great pleasure to introduce to you David Lipton, who is a Deputy Managing Director of the International Monetary Fund, but also a man with enormous experience, not merely in public policy and the government side, but also from the private sector side at Citibank and also at the Woodrow Wilson School. He’s going to be talking to us today on a narrow, tightly-defined topic of transition in the Euro-Area, the Middle East and Africa, and I’d ask you to give a big fat Henry Jackson Initiative welcome to our speaker. Thank you very much indeed.

David Lipton, First Deputy Managing Director, IMF

Thank you very much. Can you hear me in the back? Thank you very much, it’s a pleasure to be here – it’s my first visit to the House of Commons. In Committee rooms in the U.S., Congress is usually sitting on the other side, where one is cross-examined by congressmen, so it’s a rather novel experience to be at the front of the room, I’m looking forward to that.

Jesse Norman

You may need to speak up – actually can you hear me OK at the back there?

David Lipton

Is that alright, can you hear me better? Let me say again – thank you very much for having me here today. Thanks to the Henry Jackson Initiative for the invitation, and thank you Mr Norman for your kind words. Let me start by remembering back: coming here to the London G20 summit which was at the, in a sense, the high watermark of financial panic at the beginning phase of this crisis, where leaders came together really with  two objectives: to end, to stop the crisis, and to try to make sure that it doesn’t ever happen again. And I think that unfortunately, we see that, while they acted at that time and they turned the tide, that for a number of reasons this crisis really is very different. It is persistent, we see problems continuing, and we at the IMF, others in the international community, are still discussing how to stem the tide of this crisis. We had discussions at our annual meetings in Tokyo just last month about where we need to go from here.

Most of the focus of our work is on two parts of the world: what’s going on in the Eurozone, and the historic challenges in the Middle East, and I think I will discuss them today in reverse order. Most of the attention goes to issues of the Eurozone, but I want to make the point that we must not all be distracted by our own difficulties –  in the United States with fiscal issues, and in Europe with problems with Europe – and miss the historic opportunity to help the Middle East transform itself. So I’m going to start with that subject.

Clearly the Middle Eastern countries are heterogeneous: there’s no one solution or one approach that will help any one of them. Their transitions will be different, they will make choices about in which way to go. But we at the IMF are working with Egypt, Jordan, Libya, Morocco, Tunisia and Yemen. Each are going through difficult times, each trying to chart a new future, and while they are different, they share at the core one key similarity. The call in Egypt in 2011 for bread, freedom and social justice, was a call for political, social and economic change, and all the countries share those aspirations. The stakes – they are enormous. This is historic. It is a chance for the peoples of this region, after many years of living in countries without political freedoms, without economic opportunity, to have the chance for change. But at the same time, a year-and-a-half into their transformations, we see some of the political transformations stalling, some of the economic issues lingering, and really there’s a question about which path countries in the region go down. I see three possible paths – three very different paths – that each of which would be consequential, which I will call: deterioration, restoration and transformation.

We could see an economic deterioration, with squabbling over political power in these countries that prevents stabilisation – needed stabilisation. And even more importantly prevents a meaningful, durable reform. We could see stabilisation take place, but only because of a restoration of the old establishment of the elite and vested business interests that were running the countries. That might offer some respite from the economic deterioration, but it would probably condemn countries in the region to a lengthy period of lacklustre growth and some significant frustration of the aspirations of the population. Or we could see a new economy emerge, if newly mandated governments gradually find a way to stabilise, and then move on to reforming and integrating their economies with the rest of the world. Then they have some hope, I think, of building stronger economies, with more inclusive growth that could lead the aspirations of their peoples. Now obviously this seems like an obvious choice from our standpoint of which is desirable. But the problem is that the odds are pretty much stacked against the third path right now. Domestically, there are long-standing structural impediments to growth, which I’ll talk a little about. There are deep-rooted cultural misgivings about the approaches of the West would suggest for economic reform. And the powerful vested interests of many associated with the previous regimes, with the military, with the industrial companies, are still there, and are still very effective.

This is all compounded by a challenging global environment. The countries of the region in a sense picked a very unfortunate moment to have their revolution, at a time when the world economy is sluggish, and when countries – the U.S. and countries in Europe – are very much preoccupied by their own difficulties and not so ready to help out.  So these countries need the help that they can get from the international community. The UK I think has a special opportunity: the UK is to be chair of the G8 group, and in that capacity will be heading the Deauville Partnership, which is the grouping that is G8 plus other interested countries, ready to assist countries in this region with the support that they need.

Let me talk a little bit about how I see the economics of this region, and what needs to be done. We in the IMF are focused on the stabilisation challenge – stabilisation always comes first. These countries have found themselves destabilised by the events themselves in the region, the uncertainties that have lingered because of the political squabbling that is going on, and they are in need of economic and financial stabilisation. That’s really our job to try to help countries restore stability, get their budgets under control, keep their currencies stable. Now we actually see some progress in this regard – we’re projecting a moderate recovery for the region as a whole in 2013. But the region needs finance in order to make it through this period, because capital has flowed out and these uncertainties remain. They have financing needs in the neighbourhood of 33 billion dollars just next year alone. And this is not likely to be met just by private sources – they will need official finance.

When we work with these countries, our main, immediate job with them is to help them deal with their very large fiscal deficits. The average deficit in the – for the countries participating in the Arab awakening – is about 9% of GDP, excluding Libya which really has more energy resources than the other countries.

The problem of course is that fixing the budget problem in many of these countries means moving away from an approach that has been used for many, many years. In almost all of these countries there are very substantial energy and food subsidies. These subsidies total about 210 billion dollars in the region – more than 7% of GDP – so they account for the vast majority of the budget deficit. Why do they have these subsidies? Well, they really are a remnant of the time when there was popular discontent with the authoritarian leadership, and the leadership would use augmentation of subsidies as a way to calm the population. It was a kind of Faustian bargain because the population accepted the subsidies, but of course the subsidies sapped the resources of the state in such a way that the state really couldn’t provide the infrastructure and other needed health and education spending that would have been required to build an economy that would have served the people – the needs of those people. So it was a kind of a bargain that lead to this dead-end, or difficult, juncture that these countries are in.

Moreover, the subsidies, really, while they are presented as subsidies, or were presented as subsidies to protect the poor, they really never were. In fact, in Egypt, a third of the energy subsidies go to the top twenty per cent of the income spectrum. And rather ironically, only 7% of the subsidies go to the poorest quintile – poorest twenty per cent. So there’ll have to be tough choices made to unwind this whole system, which is based really in the previous era. I think fortunately the new leadership in Egypt comes from, socially speaking, from – comes in with an understanding of the need for really, truly, only helping the poor, for building opportunity for small and medium enterprises. So they have some sympathy for making the needed changes. Necessary as these changes may be, this really would only stabilise the country, but there’s really the need for all of these countries to embark on much deeper, much more long-lasting structural reforms.  These are countries where the ruling elites controlled industry, it was a closed system, not very open to trade, producing only for home demand. It never was or had the potential of creating enough jobs for the rapidly growing populations. In Egypt, 650,000 people a year join the labour force and so they really need a strategy of turning away from controlled, domestic industry towards a strategy of opening up, integrating with the rest of the world, so that they can service the demands of the entire global economy and in that way begin to create jobs for the many, many young people – some of whom are highly educated – who presently can’t find jobs.

So the key I think is for those of us in the West to help them go in this direction of opening up, integrating, but that will mean for us opening our markets to them. The strategy of opening up is an important strategy, also because it will force them to deal with the many other structural impediments and rigidities they have in their economy. Once they open up, they’ll – I think – start to see that they’ll need to make other changes in order to be competitive. This is really a huge challenge for them. The entire region – of course in the broader region there are many countries that export oil – but if you look at the non-oil exports of the entire region, they are about 360 billion dollars. That’s for a region of 400 million people. That’s about the same as the exports of Belgium, a country of 11 million people, so you can see that really the scale of opening up that is required is substantial. But then again the potential is substantial in terms of the job-creation possibilities. But as I say, they will need to make changes in many other areas. They’ll find that they need to make these changes in order to compete: they’ll need to improve education and improve the functioning of labour markets. They have an overly regulated – in most of these countries, but particularly in Egypt – an overly regulated economy and they’ll need to find ways for companies – small companies to access finance, so that they can do better. They will come up against vested interests when they make these changes and they will come up against the problem I mentioned of convincing people to move away from subsidies. They can only do that of course if they show that the savings from subsidies are put to good uses – to building the infrastructure and education systems of modern market economies. Well I think the stakes for the West are very great – as I said the IMF has been involved in helping in the stabilisation phase. We feel that our goal is to help them stabilise, but not stabilise and stop, rather stabilise and build the base for deeper reforms. But they will need help from the international community as well. The Deauville Partnership that was launched by the G8 during the French presidency of the G8, is a framework but it really – it’s made some commitments but it really hasn’t been so active. I think it’s very important for the US and Europe principally to offer up the deal: we will open our markets to you if you will make meaningful reforms, and start a transformation that really has some promise. Along the way there’ll have to be help for them with – to garner investment – the EBRD can play a role in that. National investment guarantee agencies can play a role in starting to enhance the investment opportunities for private companies and get them into these countries to get going. So to me this is something that we at the IMF are working on: I think that the international community, despite its preoccupation with the financial crisis, will look back in some years upon this period with regret if we don’t find a way to help these countries and if they end up going down yet another dead end path.

Let me move on then and talk a little about the global outlook and the outlook for the Euro area. Our view at the IMF is that there is recovery, but it’s weak recovery. Financial markets have stabilised recently, mainly thanks to the important decisions that have been made in Europe about the financial – various financial supports that have been put in place. But this recovery is weak, it is fragile, it could well be undermined if the decisions that have been made are not fully implemented. To put this in perspective, this has been a very protracted and damaging economic downturn. For the UK and for the Euro area, GDP this year is likely to remain below the pre-crisis year 2007. We expect growth in the world to be at a rather moderate pace of 3.3 this year, strengthening a bit to about 3.6 next year. But most of the dynamism in even those modest numbers comes from the emerging market world. In fact, we see growth in the advanced economies at about 1.3 per cent this year just strengthening to 1.5 next year. We see the UK and the Euro area in mild recession right now. We expect some recovery in 2013, but at growth rates that’s really not – that are not strong enough to absorb all the slack in the economy, and to serve as a kind of firm foundation for the fiscal adjustment that has to take place.

Now there have, as I said before, there have been improvements in the recent months, especially in market sentiment, because of the forcefulness of major central banks and by some of the actions that have been taken by EU governments. Financial market tensions have eased largely in response to the Eurozone’s activation of its ESM – the European Stabilisation Mechanism. And by the announcement by the ECB of its OMT – Outright Monetary Transactions programme. That programme in particular has lead market participants to expect that – well to in a sense to worry less that the European Monetary union itself might be under threat, to worry less about the dissolution of the Eurozone. At the same time, and of course for the last year or so – really two years – Eurozone countries have made some progress in adjusting their fiscal imbalances, some progress in restoring the competitiveness of their economies and some progress in repairing damaged financial systems – restoring the capital bases of banks for example. But now the optimism, the respite that we see in capital markets, we worry may be undermined or reversed if there’s not action to follow up on the decisions. There’s still a huge amount of policy uncertainty that weighs upon markets. There are critical decisions to be made about how the ESM firewall money in Europe will be used – whether it will be flexible enough to be useful.

On the other side of the Atlantic, in the US, the election may I hope clarify a bit the course of action that the US will take, but surely we have before us the fiscal cliff – a set of automatic adjustments that would cut spending very drastically and raise taxes fairly substantially absent any decisions by the US congress to avoid that, that these would be large enough adjustments in our view and in the view of the US federal reserve, that it would likely put the United States into a recession. I think the election has now opened the way for some compromise. Both sides of that debate are saying that they’re willing to reconsider some of their long-held positions, but there’s a lot of work to be done between now and early January when the fiscal cliff deadlines linger. Japan too has a fiscal cliff, they’ve I think taken action just in the past days to try to avoid having a fight themselves about their debt ceiling. But it’s very important that all of these – all of the decisions that have been taken are implemented, and that these fiscal cliffs are avoided.

Let me say a few words about the Eurozone itself, and the economics in the Eurozone. Clearly there are several priorities. First and foremost there really needs to be support for demand. Economies in, with large budget deficits and high debts, have to adjust but it’s important that the adjustment take place in an environment in which there’s suitable growth. If not, it will never be credible that a government would stick with harsh measures year after year for the decade or two decades that are required to bring debt levels down because in the presence of, with recession, or with very stagnant growth it just won’t be possible to imagine a sustained political effort that’s too harsh, that’s too harsh as far as the public is concerned. So we’re eager to see individual countries calibrate the speed of their adjustment to their economic circumstances, to try to pick adjustment paths that are growth-friendly. But be committed to the long-run to reach their objectives.

Second, we see structural reform as part of the answer. A number of countries could make changes in their labour and product markets to boost competitiveness. While those kinds of reforms have different impacts on the real economy at different points in time, we think that there could be, there could be some quite positive effects, even in the first five year period. It’s important for countries, third, it’s important for countries to repair the financial systems. A lot of work has been done to recapitalise banks but we’re only part way through that especially in Europe. Some countries really don’t have the resources to recapitalise their own banks without running the risk that their own public finances look more problematic. There is a feedback loop in essence where banks get in trouble and the government recaps them then public finances look worse and if public finances are worse and the rating agencies downgrade the countries’ credit, then the banks are in an even worse situation and the cycle continues. And that could be broken or a step could be taken towards lessening that conflict, if Europe through the ESM were able to assist the countries with difficult public finances – assist them in their recapitalisation by providing direct equity injections into banks. That would prevent the need for countries to be incurring higher indebtedness to deal with the problems of their banks and that’s something that’s being discussed – that’s on the agenda for discussion in the coming year.

And fourth, you know we at the fund have been helping a number of countries in Europe – Greece, Ireland and Portugal have economic programmes with us, you know Greece has well known difficulties and is trying very hard, making some heroic efforts and changes. Ireland and Portugal have really complied very well with our programmes. In essence, they’ve done all that Europe has asked of them. They are making progress but they still face very substantial risks and it’s important for Europe as a whole to do what it can to support their efforts and make sure that despite their really quite important efforts, they don’t suffer too much from the risks that remain. And lastly as I mentioned, the ECB’s OMT programme – the Outright Monetary Transactions – right now remains a plan on a piece of paper and it’s important that it be deployed, that the European Central Bank show and explain how it would be used in order to convince market participants who like the idea. We too at the IMF think the concept is a sensible one to show that it actually will play the role that is [inaudible].

There are a couple of longer run challenges for Europe that I think that, while they will take many years to put in place, it’s important that they’re started now. The European – the Eurozone – well the European Union is a single market but it has national banking systems, and we’ve seen in the course of this crisis that the national banking systems’ national supervision have in some countries led to difficulties. Some countries really have not taken into account that the problems in their banks might affect other countries. There’s a lack of, in a sense, what the Communists would say, taking into account these external effects. So from an effectiveness standpoint we think it’s important that there be a broad European banking union. This would serve the first purpose of seeing that supervision took into account the broad consequences of bank behaviour and bank activities on the entire European Union. But it would also allow Europe to deal with some of the other problems that banking sectors face. We think there should be a common deposit insurance scheme. After all you don’t want to see a situation where the deposit insurance scheme of one country is not credible because the country doesn’t seem to have strong enough public finances to back up their guarantees and then have the problems spill over and affect the entire economic region. You want to have a broad resolution mechanism so that if there are banks that operate in several countries and several jurisdictions and it were to get into trouble, there would be a way to deal with that. We want to have a common regulatory environment so that there’s not a regulatory arbitrage. Now that’s something that Europe needs to begin, to show the markets that they should expect that the European Monetary Union, while not perfect, is being perfected and is heading in the right direction. A more complex subject which I won’t go into is that of fiscal union – the question of whether there should be union-wide fiscal policy, whether there should be an ability to use resources to absorb risks or cover risks that may arise in one country or another. I think what we’ve seen in the Eurozone is that shocks may hit asymmetrically, they may be very forceful in one place and have an effect that has ramifications for the whole zone, and a fiscal union would help deal with that.

Lastly, let me say a little bit about a subject where the UK has a natural leadership role and that is the financial sector. The global financial system failed in this crisis and it’s still holding back recovery and it’s hard to be confident today that the changes being made are going to leave – will as of yet leave us appreciably safer. Many good changes have taken place. Capital levels are being raised, attention to liquidity problems is greater, there are a whole set of steps that are being taken.  But there’s a need to make sure that we have no holes in the net because if there are weak parts in this net and institutional problems arise once again, we would have a recurrence of difficulties. So we at the IMF, with the broader international community, are trying to [inaudible] countries think through what are appropriate policies for their own banks and how can we encourage suitable harmonisation that there won’t be weaknesses in this financial net.

Well let me just – I think I’ve spoken long enough – I’d like to be able to have time for questions and answers. I think that to us at the IMF these two challenges: dealing with the countries in the Middle East and North Africa and helping them achieve their aspirations, and helping Europe overcome its problems – I suppose working towards architecture that will ensure that this crisis can never recur – those are our main objectives and we do what we can but we’re just an institution. We need to – we need to see agreement among the countries in the international community, here in Europe in the broader community, including emerging market countries and low income countries, come together to grapple with these problems so that the goals of that first G20 meeting here in London can be achieved. Thank you very much for taking time to listen.

Jesse Norman MP

Thank you very much indeed David and thank you ladies and gentlemen. Before we open up to questions I’m going to ask Lord Tugendhat, Christopher, to respond briefly to the very interesting lines of thought that have been laid out. Lord Tugendhat needs no introduction to those of you who know finance, or indeed the aviation world, and it’s a great honour and a privilege to have him here as a member of the Initiative, and also as one of the heads of OMFIF, a financial markets think tank. Christopher.

Lord Tugendhat

Jesse, thank you, I’ll be very brief because lots of people are going to want to ask questions. I must say I was incredibly encouraged – not surprised, but encouraged – by the way in which the economic problems were put into a political context and that when we were hearing about the Middle East, David Lipton was not just talking about modernising the economies and opening them up, but he was embedding what he was saying within a view of how the politics of the region and those societies should develop and I do think that that is very important. And likewise, when he was talking about Europe, in the Eurozone and ourselves, the way in which he talked about calibrating the austerity programmes on the one hand and growth on the other, because I think all of us at the present time, more in some countries than in others, do need to be worried about the effect – the corrosive effect – that an extreme and prolonged austerity has on the democratic process and on the institutions of the state – worse in some countries than others, but should be a cause of concern in all – and I hope that those who take the political decisions will be listening to the way in which that advice was calibrated. Now, he – I’d just like to put two questions on the table before others do. One, he talked about a European banking union, he did use the word European and therefore I do ask him whether, in that, he was referring to the Eurozone per se or whether he was referring to the European Union because, of course, although the Eurozone is different from the European Union, the banks of the ‘out’ countries such as ourselves are deeply integrated into the Eurozone. So, first of all, was he talking about something which would include the non-euro countries, such as us and the Swedes, for instance, in that banking union?

And secondly, when he talked about a banking union was he envisaging something which would just deal with the big banks or was he also envisaging that it would deal with the landesbanks and the banking unions – I can’t remember the name – in Germany, and the cajas in Spain and these much smaller bodies which have had however a very big impact on the crisis? And then he mentioned a number of European countries, but one country he didn’t mention, and I would just like to put it into the mix, was France, and how he sees the way in which things might develop in France given the way – the reluctance on the part of the present French government to tackle some of the issues – and one’s fear is that if the markets were to take, were to take a shot at France in the next year, that that would really would put the Eurozone crisis onto a different footing.

David Lipton

Thank you very much, those are excellent questions. First, I will proceed, I was told to expect this would be a bipartisan audience, so I will proceed in the spirit of bipartisanship when answering the questions that have to do with the UK. Let me say about banking union. The key is to try to make the banking system of Europe work better. Let’s start with the problem. You do in fact have banks that operate widely across Europe and the tendency before the crisis was towards pan-European banking, and so I think you really do need  – and that banking as you point out extends beyond the Eurozone per se –  so I think, in general, there is a need for coordination and internalising externalities across the entire space of the economic – the European Union. Now, that said, the approach that is being taken, the approach that is likely to prevail will start with the core of the Eurozone and then will include other countries that are willing.  And I think there are some that would like to opt in and there are some that would like to opt out. There have to be governance provisions made for those like Sweden who I think have an interest in opting in, but only if their sovereignty is respected, if their own, if they retain a proper measure of control over their own institutions is somehow built in.

For those who wish to opt out, that’s fine as well, but then there needs to be some suitable cooperation between those who opt out and whatever the scope of the banking union is because if, for example, it is the UK opting out, you will still have 25% of Deutsche Bank here, you will still have large fractions, trading operations of large pan-European banks, operating here. And there will be the need to deal with the supervision challenge and, in principal, god forbid, the need to deal with resolution if ever a large, pan-European bank encountered difficulties. So I think the architecture can be crafted to suit the challenge but first, once you start with a very clear definition of what the challenge is, and make sure whatever architecture is built is suitable. That pertains as well to the question of size – I think we did see some small and nationally special institutions encounter difficulties, and you mentioned two categories: the landesbank in Germany, and the cajas in Spain, there are others. So I don’t think any of us have a pre-specified notion of what, where, one draws the lines of, in the initial architecture of this, but to say that, that there will have to be some greater scrutiny and some broader scrutiny across Europe in order to make sure that problems that arise in one place are not allowed to become problems for the whole of the zone.

You know France has, France is now addressing its budgetary challenge as a very ambitious fiscal target, it is beginning to address structural issues. We at the IMF have just released our annual paper that we write after our annual economic dialogue. We have with each country, we have just released the ones for France and we, you can see in that paper or in the press reports just last week, the stress that we’ve put on the structural adjustment front. I think the French government is proceeding in an earnest effort to try to improve the situation in France. It is as you say important not just to France but to Europe and to the globe. Let me ask if there are others who have questions.

Jesse Norman

Thank you very much indeed David. Let me just take one here and then we’ll go around the room, trying to mix it up between different parts and different – can you stand up and say who you are before you ask your question?

Question 1

Hi, I’m [inaudible] South Asian Middle East Forum. Thank you for your presentation today. I’m interested to know exactly what the IMF and the World Bank is doing right now in the Palestinian territories, sort of break down the amount et cetera. I, when I visited Israel and the West Bank, I was quite struck by people from both the Israeli and Palestinian sides saying that the separation barrier causes an [inaudible] on trade and exchange of employment between the Palestinians and the Israelis and has sort of decimated the economy of the Palestinians. How do you think that has affected the economy of the Palestinian territories today?

Jesse Norman

David, if you don’t mind repeating the question quickly for the folks at the back and obviously we’ve got about ten minutes so we’ll need to keep questions and answers ideally relatively quick.

David Lipton

The question was about the IMF and World Bank’s involvement in helping the Palestinian territories. These of course are formally not nations and not members, so any help that’s given has to be under some special provisions for entities that are not members. The World Bank is far more active than we are because of the development challenges. We’ve been giving over time some advice but we don’t have financial interactions that are very significant. There are discussions about whether there could be some more substantial supports. Support has to come from donations of the international community, while the territories are not countries and not members, we don’t have a way to provide financial resources under our lending facilities. It would only be through donations that were made to us or grants that could be given. I think your point is an important one, that trade is key to such small entities and that access for their trade is important.  And it’s no secret that this gets very bound up in political issues and the, the conflict between the territories and Israel. I don’t have any particular insights into where that process is going so I don’t have much more to add on that front. Other questions?

Jesse Norman

Yes, Madam, at the back.

Question 2

[inaudible] from Dow Jones Newswire. Can you hear me? Last night, we saw some differences emerge between the IMF and the Eurozone governments over how to reduce Greece’s debt and whether or not some of the governments should reduce some of the debt. Can an agreement be reached on this and what form will it take?

David Lipton

The question for those who might not have heard is about the discussions ongoing about how to support Greece. There was a meeting of the Euro group yesterday with Euro group finance ministers, our Managing Director, Christine Lagarde, was present. The question is how to help Greece. You know, as Managing Director, Lagarde has said we view the Greek problem as having, if it were a book, having to have four chapters. They need to in the first chapter address the budgetary problems that they have, which are substantial. They’ve made a lot of progress, they have more to do. They have structural adjustments to make – there are many senses in which their economy has been managed in a way that leaves it too rigid. They need reforms including in labour markets and pension areas. They have some remaining financial needs – we have an economic programme with them that stretches over four years and because the situation has deteriorated to some extent, they have some unmet financing needs.

And then fourth, they need to have debt sustainability. It needs to be that if people look forward to the end of their adjustment effort, they see that their debt has been rising because they have deficits, people have to see that it crests and comes down suitably to a level that’s sustainable. And this is not just a matter for the future, it’s really a matter for today because one is asking the Greeks to continue very hard adjustments, one is expecting the Greek business community to keep doing business, one is expecting the foreign community to invest in Greece and participate in privatisations and it’s hard to imagine that they will – that those, all of those actors will play their desired roles, if they view this as unsustainable at the end of time. So we have done what we always do, which is to try to tell the truth and put the facts on the table and that is that there is an issue around Greece’s sustainability. Now at the meeting the other day – yesterday – there were some disagreements about how big a problem this is and how to deal with it. I would just characterise it as a debate that is ongoing – it’s an important one – and I think that the role that we best play is in essence to be on Greece’s side. They are a member, they’re borrowing from us, we’re trying to help them, and we view part of being on their side as saying there really have to be all four chapters in this book.

Jesse Norman

Ok, questions, thank you, David. Sir, at the back over there.

Question 3

David, about a year ago a US Nobel Laureate made a speech, which said that if you look at the economic performance of Europe and the US, Europe has stopped converging with America. Although the growth rates are about the same, US per head income is about 15 – 20% greater and always will be on the basis that Europe had a welfare system and America didn’t. Now, given the events of last week in the US, will that compromise the US’s future leadership in the world?

David Lipton

Let me start by saying I don’t necessarily put too much stock in Nobel Laureates, but I don’t know to whom you’re referring. I think that the US and Europe have devised two rather different systems, based on two rather different approaches they wish to take to the role of government and the consequences will be what they’ll be. And certainly from the standpoint of our institution, when we give advice it is with an understanding that countries make choices from a social and cultural standpoint about the kind of societies they wish and the role that they wish transfer payments to play in their economies. If we look at a country and believe that the trajectory of a category of spending really endangers stability we’ll say so and I think in the United States there’s – it’s clear that there are some categories, health spending, that want to be put in that category. So you know, I think in individual cases, we will offer our views based on whether we think countries are achieving the goals that they set out in a way that is safe from the standpoint of the stability of the country and its role in the international community. But beyond that I think it is probably right that there will be some consequences, some differences in the futures of countries, based on the choices that they make. And that’s ok.

Jesse Norman

Thank you. Yes, sir, in the purple top

Question 4

My name’s Harold Forman [inaudible] referring back to the remarks on Greece, it would appear to me, and possibly to many others, that the time you’ve given – four years – is too short for a situation. This time perhaps could be extended to 7 or 8 years but then it would [inaudible] austerity not to this absolute four years. I would like to hear your comments on this.

David Lipton

The question was whether four years – I had mentioned that our programme encompasses a four-year time frame – and the question was whether that is too short for what Greece needs to do. We agree with you, and in fact, one of the – you know, we’ve had various rounds of review of the Greek programme and this review, which has gone on now since the Greek elections earlier this year, one of the conclusions we’ve made is that they need a couple more years to make the adjustments that they’re setting out to make. Now, our lending operation is over a four-year period but we have re-profiled their – with them – they requested this, they said it made sense. We looked at it, we agreed. We’ve re-profiled the effor, and in a sense the track that they’re on to take an extra couple of years to achieve the goals that had previously been, had been mutually agreed, so I think in essence we, we agree with you on that point.

Harold Forman

Do the Greeks understand this?

David Lipton

The Greeks understand. I mean, of course you have to – that, in essence is an adjustment of what I was calling chapter one, the fiscal adjustment. There’s a consequence in chapter three, which is that if you adjust more slowly, you need more money each year. And so, you know, the Greeks looked with us, looked at the trade-off of the different path to higher borrowing needs and so on, but we have agreed with the Greeks and I think, to the extent that they’ve explained it well to their public, I can’t tell you – I don’t follow that closely enough. But I think we and they have agreed on a new, a new, we think, reasonable approach.

Jesse Norman

Thank you, David. Ladies and gentlemen, we’ve got two and a half minutes, and let’s try and take two questions. Sir, here, and then the gentlemen in the blue.

Question 5

I’m Peter [inaudible] from the [inaudible] Project. I’m interested in your comments on Egypt. I just wanted to get a sense of a couple of things which you talked a few times about. The role, you know, countries making choices about the role of government [inaudible]. In Egypt, some of the democratic opinions offered against some of the policies you’re talking about to do with fiscal adjustment … So I want to hear how people address that very real problem of democracy. And the second related question is that a lot of the fiscal problems are related to debt incurred under the previous regime or government. And I wanted to hear what you think about what to do about some of the debt particularly where it might have been related to things such as military expenditure, which we’re not [inaudible]

David Lipton

Thank you – those are good questions. The two questions were about, in Egypt, where the population may not agree with the kinds of changes that I’ve been talking about. And the second is a question about odious debt – debt incurred by the previous regime. There’s no question that in every, I mean I’ll speak just about Egypt, in a range of countries, subsidies on food and energy tend not to go to the poor the way it’s originally prescribed, but to richer strata of the population. And it’s the case that there’s often sensitivity when a government tries to make changes. I think what we see is that the ones that are successful in making the changes are the governments that explain the stakes to the people the most clearly. They explain who’s receiving subsidies, and how much. They explain the opportunity costs of that: in essence, what we could do with that money if we didn’t give it to you as a subsidy. And they explain how they will take care of the poor.

There are examples: Indonesia’s one, Kenya’s one, there are others that have eliminated, or nearly eliminated, these subsidies and have replaced the subsidies for the poor strata with cash transfers so that people who really need the money have it and they don’t merely get energy, they get cash which they can use in some measure for things that are even more necessities. So Egypt will face this challenge. It will need to explain to the population the stakes and how they’ll take account of the poor. I can just say that it is the government’s, I mean from our discussions with the leaders of Egypt, and that’s across the spectrum, those from the Muslim Brotherhood in positions of power and their chosen Ministers and governors seem to be of the view that this is important, it’s important to do. They want to take some time to explain it. And so we view our job as helping them explain it as best we can. Now as far as the debts are concerned, some in Egypt, some in other countries, have pointed out this issue.

The question of whether the debts from the previous regime should get some special treatment. In the case of Egypt, they have in particular made this case with the United States, which was one of their larger funders. And President Obama and his Secretary of State, Clinton, have committed to a plan to deal with I believe a billion dollars worth of debt from the previous period and find ways to convert it to other, better uses rather than have that debt repaid by Egypt. And all the countries were approached through the G8 process to ask if they wished to follow the approach being taken by the US. But so far I think the US is alone in having made that decision.

Jesse Norman

Thank you for that. We’ve got one final question here from the gentleman – we started late, and then we’ll wind it up. Thank you, sir.

Question 6

Yes, I’m unaffiliated. I was wondering about Turkey in the context of the North African countries and the Middle Eastern countries. A Muslim country, a democratic country, one with a well-developed economy by now, and it occurs to me that their involvement might illicit less suspicion than that by Western-led institutions.

David Lipton

The question was about the possible greater role of Turkey in serving as a mentor, or leaders, in the Middle East. I think that your point is an excellent point. I completely agree. Turkey shows that a country that is Muslim and that has a government lead by a party with a religious orientation can lead its economy successfully. They are taking a greater role – we welcome that role – I think it has a lot of promise. I would make one slightly broader point, which is that Turkey undertook very substantial economic changes, structural changes, over the course of ten or fifteen years when they believed that membership in the European Union was hanging upon those decisions. It provided a huge discipline to them to change their economy and integrate it into the European economy. There is no such similar option or promise for Middle Eastern and North African countries. And if there is some way, through an offer of greater trade integration, or other kinds of integration, to reach out to the MENA countries in any way remotely like the way Europe reached out to Eastern Europe, reached out to Turkey at least initially, I think that would be perhaps a quite compelling, a quite compelling force.

Jesse Norman

Well thank you, thank you ladies and gentlemen for coming, and on your behalf let me thank first of all Fleur and the Henry Jackson Initiative for hosting today’s event, and organising it, Christopher Tugendhat for his excellent comments, and most of all, our guest speaker David Lipton, thank you very much indeed.


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