Friday, December 16, 2011

Lagarde Warns of Depression

I was skeptical when Christine Lagarde was appointed to head the IMF in the wake of DSK's disgrace, but to date she has proven to be the only world leader to recognize the seriousness of the crisis. Yesterday she issued a stark warning:
On a day that saw an escalation in the tit-for-tat trade battle between China and the United States and a deepening of the diplomatic rift between Britain and France, Christine Lagarde issued her strongest warning yet about the health of the global economy and said if the international community failed to co-operate the risk was of "retraction, rising protectionism, isolation".
She added: "This is exactly the description of what happened in the 1930s, and what followed is not something we are looking forward to."
The IMF managing director's call came amid growing concern that 2012 will see Europe slide into a double-dip recession, with knock-on effects for the rest of the global economy. "The world economic outlook at the moment is not particularly rosy. It is quite gloomy," she said.

These words should have gotten everyone's attention, but Lagarde's successor as French minister of finance, François Baroin, preferred to whine about alleged France-bashing by the British: "One would rather be French than British," he said. "The British economic situation today is quite worrisome." Indeed, it is, but Christian Noyer's complaint that "the British don't deserve their AAA" seems to be a pre-emptive justification for the impending loss of France's AAA. It's true that Britain has a higher debt/GDP ratio than France, but it's also true, as Noyer well knows, that Britain issues its own currency. Whether Britain's inflation risk is greater than France's default risk is a theological question. Noyer should spend more time listening to Lagarde and less worrying about sovereign credit ratings, which have become more or less meaningless since the US downgrade. Nevertheless, Paris seems more obsessed with the rating than with the 100 bp premium over British gilts that it is currently paying:

[The Guardian's] Paris correspondent, Kim Wilshirewrites that:
French politics descended to the level of the school playground as two cabinet ministers and a senior bank official were reduced to shouting names at Britain from across the Channel.Having sidelined Britain over a new treaty designed to save the crisis-hit eurozone a week ago, the French launched an ours-is-bigger-than-yours row over the state of each country's economy.Kim flags up that French prime minister François Fillon also took a pop at the UK during a during a visit to Brazil, saying
Our British friends have a higher deficit and debt [than us] but it seems the ratings agencies have not yet noticed.