Three Ways to Unlock Strong, Stable, Balanced Growth

Global recovery set to post reasonable near-term growth but remains unbalanced

Essential that eurozone, U.S. debt problems be addressed quickly

Middle East events show effects of socially imbalanced growth on politics

These challenges are intimately intertwined, and only by solving all three can the world unlock strong, stable, and balanced global growth, she said.

In a July 26 speech at the Council on Foreign Relations, Lagarde stressed that for sovereign debt to be sustainable, economic growth needs to be strong, but in a sustainable way. “And for economic growth to be sustainable, it needs to deliver the stable social chemistry that holds societies together.”

On sovereign debt, Lagarde said fiscal problems in the periphery of Europe had revealed the risks posed by an incomplete economic and monetary union. She noted that eurozone leaders had reached an important agreement, including a commitment to finance program countries until they can regain market access, as long as those programs are implemented effectively. This means that for Greece and other program countries the main priority is “implementation, implementation, implementation.”

“The agreement shows that European leaders believe in the eurozone, and will do what it takes to secure its destiny,” Lagarde said. “It has been welcomed by financial markets, as reflected in the stronger euro and lower peripheral bond spreads. But turbulence could easily resurface. For this reason, it is essential that the summit’s commitments should be implemented quickly.”

Lagarde said she hoped for bold fiscal action in the United States. "On the debt ceiling, the clock is ticking, and clearly the issue needs to be resolved immediately. Indeed, an adverse fiscal shock in the United States could have serious spillovers on the rest of the world. But more fundamentally, a credible fiscal adjustment plan is needed sooner rather than later." The less urgent situation in Japan also needed ambitious measures to deal with the very high level of public debt, she said.

Unbalanced recovery

On growth, Lagarde said the global recovery is set to post reasonable near-term growth but remains unbalanced, with signs of overheating in emerging economies, surging commodity prices hitting low-income countries, and deep and long-lasting crisis effects in advanced economies.

“Boosting growth in these economies is no small task. And the goal can’t simply be any growth—we need the right kind of growth, that...