An interview of the new head of the IMF by the newspaper Le Monde

The European Central Bank has too much power

interview of Mr. Strauss-Kahn, by Alain Faujas

Le Monde, 4 March 2008

Inflation is back. The dollar tumbles. The subprime crisis grows everyday more serious. It is a very difficult economic and monetary environment to which Mr Strauss-Kahn is confronted since he arrived at the helm of the IMF, 1 November 2007. In the following interview with Le Monde, Mr Strauss-Kahn expresses the opinion that it would be a mistake to fight inflation "using price controls" or "only with a tight monetary policy". Concerning the rapid rise of the euro, he thinks that "the problem is that the ECB [...] has too much power, with no political counterweight". He recommends a worldwide budgetary stimulation in the face of the world crisis.

Mr. Dominique Strauss-Kahn, general manager of the International Monetary Fund (IMF), since the 1st of November 2007, just completed a trip throughout Africa, where inflation plays more havoc than in Europe. To fight this curse, he recommends an increase of cultivated lands, a reduction of taxes on basic products and temporary subsidies - quite an innovation for the IMF.

In France, inflation, which reaches 2,8%, provokes a harsh dispute on the possible appropriateness of price controls. In Burkina Faso, where inflation is said to have reached 67% over the last two months, it created riots, on February 28. Why this global come back of inflation?

It is necessary to understand what happened. Inflation was initially caused by the increase of energy prices, spurred by a growing demand from emerging countries, while oil production experienced difficulties keeping up. One may think that the current economic slowdown will entail a decrease in oil prices; the IMF does not foresee an explosion of the barrel price.

The second cause of the current inflation is of agricultural origin. Supply was tightened by climatic events, like the drought of 2007. Meanwhile, production became more costly due to the hike in energy and fertilizers prices. We also observed a propensity to consume more agricultural products in China and India, which is a good thing we should rejoice about! And then, there is the rush on biofuels, which represent half of the growth of demand for maize and soybean.

These pressures caused a strong inflation, which, in Sahel countries, reaches two digit levels. I am not surprised at the reactions in developed countries, and, even more severe, in poor countries where it is a question of life or death.

What should be done?

In the long term, develop agricultural lands. In some countries like Nigeria, which used to be an exporter of agricultural products, but which abandoned them to concentrate on oil production, it is necessary to think about a new diversification into agriculture.

In the short term, we must avoid two mistakes:

1. price controls forcing one to sell on the basis of false prices, which discourage producers when they should, on the contrary, be encouraged to produce more
2. the credo according to which the only way to fight this type of price hike is a strict monetary policy

Governments, however, could accept a decrease of their revenues to make the situation more bearable. For instance, Burkina Faso, suspended, on February 27, import tariffs on rice and powder milk. As regards developed countries, they can create a "floating" tax on mineral fuels in order not to aggravate their price rise with taxes.

Subsidies may even be legitimate in a crisis: the IMF recommended the government of Senegal to give subsidies to rice and to create a "food security net" in favor of the poorest. But to grant subsidies is to sacrifice the future to the benefit of the present, because it is all the less that is devoted to investment.

Is it possible to correct the current monetary disorders?

The situation is serious. If the subprime crisis and the potential difficulties of the American reinsurance sector contaminate even further the real economy, lowering even more confidence and consumption in the United States, all countries on earth will pay the price. A first line of defense was put in place by the US Federal reserve and by the ECB: they both injected important volumes of  liquidities to avoid a crisis. I suggest another line of defense: those countries the public finance of which are healthy could help and decide to set up budgetary stimulations, at the right time, in a focused and temporary way.

Which countries could participate in such a budgetary assistance?

India said it was ready. China, which counts more and more on its domestic consumption and less and less on exports, and oil producing countries, of course. The IMF calculated that countries which have the possibility to participate into this effort represent 20% to 25% of world wealth. Together with the $100 billion investment plan to help economy, decided by the United States, this stimulation could concern half of the world population. To worldwide problems caused by globalization, we must bring worldwide answers. People express surprise at my proposal, because they only think of the IMF as an international institution preaching sacrifices. Our approval of subsidies by Senegal - and it is not the first time - and this project of worldwide stimulation demonstrate that the IMF does not systematically advocate restraint!