Lagarde: Debt ceiling breach 'most serious thing that could happen'October 15, 2013: 10:12 PM ET
IMF chief warns that a temporary debt deal will bring more economic angst.
By Anne VanderMey, reporter
FORTUNE -- A short-term debt-ceiling fix now appears to be the most likely outcome of the prolonged political mud fight that has shut down the government for the last 15 days. But even if lawmakers do manage to pass an extension, it will do little to resolve the larger questions over U.S. economic leadership, International Monetary Fund Managing Director Christine Lagarde said Tuesday.
Lagarde warned that a stopgap measure would bring lawmakers "back to the drawing board once again." With only two more days to go before the nation loses the ability to manage its debts, Congress appears to be lurching toward a deal that would temporarily reopen the government and extend the country's borrowing authority for at least a few more months. That, Lagarde said, will inevitably "reactivate the same sort of trepidation and anxiety and worry" that has gripped world policy makers for weeks already.
Lagarde spoke at Fortune's Most Powerful Women Summit in D.C. on Tuesday night against a backdrop of so-far unyielding partisan gridlock in Washington. She warned that if lawmakers cannot find a way to avoid a debt-ceiling breach, it could trigger global economic chaos. "It's the most serious thing that could happen," Lagarde said. "If it's not addressed, if it's not tackled, it will be very, very damaging -- not only for the U.S."
Lagarde's comments come after her recent public warnings that failure to reach a deal would wreak "massive disruption the world over." Other world leaders have echoed her concerns. During the IMF's annual meetings this weekend some 300 ministers of finance and governors of major central banks convened to talk about how to bolster the recovery. But instead of talking about the global economy's fragile growth prospects, "The only thing that was on their mind was, 'When is this [debt-ceiling fight] going to end?'"
Lagarde Tuesday had more cheerful things to say about the European political process. "Mario Draghi [president of the European Central Bank] has done an extraordinary job," she said. Trying to unite 18 countries with a single currency and a single set of fiscal policies, is incredibly difficult: "It's a job," she cracked. But she added, "they're not going to let it drop like that because of lack of courage. The courage will eventually be there to respond to the challenge. It's a huge challenge."
As for the U.S., Lagarde espouses a two-pronged approach: "I summarize it for my simple mind as, slow down but hurry up." "Hurry up" by taking measures quickly to rein in entitlement spending and inflation. Those issues "will come to haunt the economy in 2020 if nothing is done before," Lagarde said. And "slow down" by not making any cuts so sweeping or drastic that they would thwart a recovery.
Unemployment will be an increasingly critical issue, Lagarde said. There has been marked progress in the U.S. since the crisis. The unemployment rate has fallen from 10% to 7.3%. But gains are still fragile, particularly in a rapidly changing economy. "I think we are facing huge transitions," she said. Going forward, "[Americans] had better have jobs, otherwise we're not just facing economic problems, we'll be facing social problems."
Lagarde was the first woman appointed finance minister in a G8 country, and became the first female chief of the IMF in 2011. She has spoken previously about not wanting quotas for women on corporate boards, though she later reversed her stance. "Look it's working," she said. But she added that "quotas should not be a long-lasting feature because we can do better than that."
Even before she was making strides for women in the policy world, Lagarde had a colorful history. She was briefly a guide for French tourists at Alcatraz Island prison, got turned down from an elite French school twice (once because she was distracted: "I was in love that year," and once because she missed the deadline), and she was an accomplished synchronized swimmer. The takeaway from her swimming days: "Grit your teeth and smile."
In politics lately, it's a skill that has no doubt proved particularly useful.