Fareed Zakaria just sat down with the new head of the International Monetary Fund, Christine Lagarde. They talked about the U.S. deficit and the debt ceiling debate. Here are some highlights. For the full interview, tune in this Sunday at 10am ET/PT.
Lagarde on the consequences of default
Fareed Zakaria: The IMF just released a report in which it said a crisis of confidence in the solvency of the U.S. government would cause a crunching global recession. How worried are you right now?
Christine Lagarde: I am worried because this debt ceiling issue has not been cracked. The issue is being addressed from multiple angles but the debt ceiling is still on the table. The U.S. is the largest economy on the world, one that matters, one that has spillover effects, not just around the borders but on a complete basis, globally. And it’s an issue that is lurking in the background of each and every economy in the world, which is why I think there is a very every high level of pressure and tension so that issue can be addressed and dealt with properly with a solution.
On dealing with deficits
Fareed Zakaria: When the IMF looks at previous examples of debt issues, deficit issues. When you’re dealing with deficits of this magnitude of the U.S. and the eurozone countries, can you do it all with spending cuts, or does history suggest that you need what President [Obama] calls a 'balanced approach'?
Christine Lagarde: It varies – it will depend from country to country and there is no magic bullet. Sometimes we have the best solution because they are straight from the textbook. And it works - on the textbook. But sometimes you have to settle for the 2nd best option - the one that will be feasible the one that will be politically acceptable.
But the States should NOT be only focused on strictly political objectives. It has to be a mixture of political feasibility but based on solid economic rationale. And today the economic rationale is about cracking the debt ceiling and making sure that in the medium term the USA - like many other nations - addresses the fiscal consolidation issues that have to be addressed.