JUDY WOODRUFF: The head of the International Monetary Fund issued a warning to U.S. policy-makers today.
In an interview with the NewsHour, Christine Lagarde said Washington must find a way to avoid overreacting to debt and fiscal deadlines at the end of the year. That's when a series of spending cuts are set to take effect, and when Bush era tax cuts are set to expire.
Lagarde suggested prescriptions offered by both political parties could harm the U.S. and global economy. She spoke after the IMF reported that the U.S. recovery remains tepid and is likely to stay that way for the coming year.
I sat down with her at IMF headquarters in Washington earlier today.
Christine Lagarde, managing director of the International Monetary Fund, thank you very much for talking with us.
CHRISTINE LAGARDE, Managing Director, International Monetary Fund: My pleasure.
JUDY WOODRUFF: So the IMF is out with a new report projecting weaker growth for the United States. What does the report say? And what are you recommending?
CHRISTINE LAGARDE: What we essentially say is that there is recovery, so we are in positive territory. The U.S. economy is growing.
But the recovery is tepid. It's much slower than what we would like. We predict that, in 2012, the recovery will be at about 2 percent. And we forecast the recovery in 2013 at 2.3 percent, which is certainly less than what would be desirable to create jobs and develop activity as would be needed.
But it is positive. And in terms of policies -- well, let me just tell you about the risks as well, because the 2 percent and 2.3 percent is associated with potential, what we call, downside risks, things that could happen that would rock the boat a bit.
And we see two major risks. One is a risk coming from the outside, where the crisis in the Eurozone would deteriorate, as opposed to what we're beginning to see. And the second potential risk is at home, a domestic risk, where the combination of the debt ceiling and the fiscal cliff would erode confidence and would create a potential contraction of the U.S. economy in 2013.
JUDY WOODRUFF: So, you're saying to U.S. policy-makers, cut spending, but don't cut it too deeply? Is that what you're saying?
CHRISTINE LAGARDE: Correct, correct.
What we're saying is that there is not a lot of policy room. Let's face it. But that little policy room that is available should be used wisely to avoid those -- particularly those domestic risks, because the external risk is not something that you can do much about. But the risk at home is clearly that growth be contracted so much next year that there will be fewer jobs, less activity created.
So, we think that the deficit for the next budget should be reduced by 1 percentage point of GDP, no more than that.
JUDY WOODRUFF: As you know, the -- there is a very strong debate in this country about what to do. And conservative economic thinkers are -- and policy-makers are saying almost just the opposite. They're saying cut as much as you can. The big worry now is the debt and the deficit.
CHRISTINE LAGARDE: I agree with them, not on the prescription. I agree with the analysis.
The big problem that needs to be tackled is the debt. No country can go on with heavy and growing debt, as it would if no measure was taken. But what we're saying is, is that in order to bring the debt under control, action needs to be taken over a period of time. That is not just next year. That is going to extend for the next 10 years. And it needs to be gradual, not so contractionary that the economy stalls.
JUDY WOODRUFF: And what's the IMF's recommendation about the so-called Bush administration tax cuts, whether they should expire or not?
CHRISTINE LAGARDE: We -- our forecast of 2.3 for next year is predicated on the tax cuts being extended for another year. And, certainly, what...
JUDY WOODRUFF: At all income levels?
CHRISTINE LAGARDE: All in all, we assume that the Bush tax cuts will be maintained, extended for another year.
JUDY WOODRUFF: There are going to be some Americans watching this who say, we have got so many experts to listen to. Why should we listen to the IMF?
CHRISTINE LAGARDE: They don't have to listen to us. It just happens that the IMF is a multilateral institution that has 188 members from around the world, that is totally independent from influences, political ambitions and aspirations, and which has been trying to do a decent, honest, candid job for the last 60 years.
So, we're not affiliated to the U.S. Treasury Department, nor are we affiliated to any other authority around the planet. But we have a multilateral base of economies that are trying their best to understand the situation of each and every economy in the world and to draw a diagnosis and offer policy advice.
Now, people either take the advice or don't take it. It's their responsibility.
JUDY WOODRUFF: As you also point out today, one of the main drivers of what could happen in the U.S. is in Europe. And you pointed out there is a down -- potential more of a downside risk. But with the recent agreement, I think many skeptics are looking at that and saying, wait a minute, is this really something that is going to alleviate the problem, or is this just another Band-Aid, and there's going to be another Band-Aid and another Band-Aid that's needed down the road?
CHRISTINE LAGARDE: We have seen many announced major changes which have collapsed on the following day or the day after.
What we have seen on Thursday is something of more significance, because it lays out the path for the immediate future, when countries like Spain need to recapitalize and restructure their banking sector and would be allowed to do so directly using the European stability mechanism, without traveling through the sovereign, which is very important in our view.
And, second, it also lays the path for a longer-term project, which is to move from a strictly monetary union to a bigger union that would become also a banking union within a relatively short period of time, because the leaders have asked the president of the European Council to put this plan together before year-end. They need to go farther. There's no question about it.
They need to move towards fiscal union as well, which will take probably more time, more summits, more illusion disillusion. But they're heading in a new direction together. And that's a clear sign that things are changing.
JUDY WOODRUFF: One of the things people have commented on is that Germany seems to have been more accommodative than in the past under Chancellor Merkel.
And the question is, is there a new dynamic, with President Hollande of France and the role he's playing? How do you see that?
CHRISTINE LAGARDE: There's clearly more focus on a balanced approach between fiscal consolidation, which is happening in the Eurozone -- when you look at the fiscal deficit in the Eurozone, it's in the average of about 4 percent at the moment, so -- and moving in a direction of being under 3 percent in the next couple of years -- and growth.
That's a new dialogue that they're having at the moment, consolidation, yes, but growth as well. And the whole of it is canvassed put into a larger project, which will take them further, monetary, banking and hopefully fiscal union later on.
JUDY WOODRUFF: And one final question about the Eurozone. People are still worried about Greece. Can the Eurozone survive the departure of Greece and can Greece survive leaving the Eurozone, if that were the decision taken?
CHRISTINE LAGARDE: It's apparently not the decision that they want to take.
The Greek population is clearly supportive of staying within the Eurozone. The Greek authorities have affirmed that principle. The euro partners have, you know, consistently, cohesively repeated that they wanted to stay together. So we need to -- for ourselves, we need to provide all the groundwork to help them to stay together.
JUDY WOODRUFF: And, finally, the message to the United States. What's at stake? I mean, the advice today from the International Monetary Fund to the United States, what's at stake if the U.S. doesn't follow the advice of the IMF? What could happen?
CHRISTINE LAGARDE: The United States of America is the largest economic power in the world. It is an open economy. It matters a lot to the rest of the world.
And it's obviously in the interests of the United States' economy, but also in the interest of better stability in the world, that those downside risks that I mentioned, the fiscal cliff, the debt ceiling, be addressed as cohesively, as cooperatively as possible, so that the U.S. economic tepid recovery is turned into something that is much more lukewarm and -- and warm.
JUDY WOODRUFF: And you have shared this with U.S. policy-makers?
CHRISTINE LAGARDE: Yes, indeed.
JUDY WOODRUFF: Christine Lagarde, the managing director of the International Monetary Fund, thank you very much.
CHRISTINE LAGARDE: Thank you.