Dominique Strauss-Kahn, IMF: World Economy Highly Vulnerable

The global economy remains highly vulnerable, although the worst has passed, according to International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn.

"Today the storm has passed. (...) We can say that the recovery has started but everyone understand that it is very fragile and still dependent on policy support. The financial conditions have improved but are still far from normal. (...) "The economy is getting better, but is still highly vulnerable", Strauss-Kahn told the annual conference of the Confederation of British Industry in London.

Dominique Strauss-Kahn believes that, although politicians proved unity during the crisis, the sustainability of the ongoing recovery depends on continuity in cooperation and the way of dealing with the great challenges, which could generate a new crisis, if not dealt with correctly.

In his opinion, the greatest challenge is linked to the moment of releasing support packages. "Exit too soon, and you kill the recovery. Exit too late, and you sow the seeds for the next crisis," he said. As the pace of economic recovery differs from one country to the next, exit strategies should also differ, he stressed.

Another challenge would be to correctly adjust capital flows to emergent markets. "On one hand, we want capital to flow towards emerging markets ... but these flows can clearly be destabilising," Dominique Strauss-Kahn said.

Yet another challenge he brought to attention concerns the change of the growth model. The former model was based on financing consumption through cheap and easy loans, which were increasing imports from countries that were in turn substantially relying on imports to achieve GDP growth. The countries with a surplus in their foreign trade balance should be the first to stimulate domestic demand now.

The fourth challenge lies in the need to regulate the financial sector, as an increasing appetite for risk is accompanying economic recovery. Under these circumstance, Strauss-Kahn recommends an augmentation of the liquidity buffers in order to contain excessive risks.