Lagarde warns of 'triple crisis' ahead of Rio summit

The world faces three threats – economic, environmental and social – that "feed off each other" and cannot be addressed in isolation, International Monetary Fund managing director Christine Lagarde said today, as she called for "decisive" action by European policy-makers to address the financial crisis.

In a speech in Washington looking ahead to the United Nations conference on sustainable development in Rio de Janeiro later this month – two decades after the first Rio earth summit that led to the Kyoto Protocol – Lagarde said the trio of challenges had to be tackled as separate "parts of a connected whole".

Describing what she called a "triple crisis", she warned that policy-makers heading to Rio did "not face the best of circumstances". She explained: "The global economy is still rocked by turmoil, with uncertain prospects for growth and jobs. The planet is warming rapidly, with unknown and possibly dire consequences down the line. Across too many societies, the gap between the haves and have-nots is getting wider and strains getting fiercer.

"Although distinct, these different threats feed off each other in an intricate interplay. We cannot address each in isolation. We need to generate a virtuous and avoid a vicious circle." Policy-makers should "strive for economic growth, environmental protection and social progress at the same time", the former French finance minister said.

The "first key step" towards sustainable development had to be financial stability – which should start with advanced economies "especially in Europe", Lagarde said. "Policy-makers need to take decisive steps to break free of the crisis." However, she also urged the rest of the world to do its bit.

"Most developing countries are doing relatively well right now, and are a source of strength and stability. But if conditions in the advanced economies continue to deteriorate, these countries will face a cold chill." She said those countries with "fiscal space" should be prepared to use it.

However, Lagarde said economic growth had to be "on a different track" to before the crisis in order to meet the challenge of climate change. "The IMF is not an environmental organisation. But we cannot ignore the extensive human suffering and the misallocation of resources that leads us down the wrong path."

She said fiscal policy should be used to "make sure that the harm we do is reflected in the prices we pay", adding: "I am thinking about environmental taxes or emissions trading systems under which governments issue – and preferable sell – pollution rights. It is basically a variation of the old mantra: 'you break it, you buy it'." She said IMF staff were working on "actionable guidance" for advanced and developing countries on setting prices.

Lagarde said the Washington-based fund was also looking at "ways to spur both growth and jobs" so that "all share in the fruits of prosperity" and have the opportunity to fulfill their potential. "We all belong to this larger family of life," she said. "Economists, environmentalists, and social policy-makers. Public sector, private sector, civil society, and international organisations. We must all come together and work together."