THE HEAD of the International Monetary Fund has warned that eurozone member states must become more deeply integrated if they are to put an end to the common currency’s “crisis of incomplete integration”.
Speaking in Berlin this morning, IMF managing director Christine Lagarde said countries also needed to construct ‘larger firewalls’ and to create the conditions for stronger economic growth.
“Stronger growth also means preventing banks from going into reverse gear, contracting credit in the face of market pressure,” Lagarde said, explaining that banks should focus on raising capital levels, rather than cutting back on lending, as a way of boosting their reserves.
Lagarde also warned that the austerity being pursued across Europe could do more harm than good – remarking that “across-the-board, across-the continent, budgetary cuts will only add to recessionary pressures”:
Yes, several countries have no choice but to tighten public finances, sharply and quickly. But this is not true everywhere. There is a large core where fiscal adjustment can be more gradual.
Lagarde argued that a larger ‘firewall’ around weaker countries would mean countries like Italy and Spain – which she said were “fundamentally able to repay their debts” – would not be faced with penal interest rates because of their proximity to other weaker countries.
This firewall could be built by “adding substantial real resources to what is currently available by folding the EFSF [the EU's current bailout fund] into the ESM [the new one coming into effect on July 1], increasing the size of the ESM, and identifying a clear and credible timetable for making it operational would help greatly.”
On the topic of integration, Lagarde argued that it was not feasible for a single currency to be at risk of manipulation by each of 17 governments.
“It is not tenable for seventeen completely independent fiscal policies to sit alongside one monetary policy,” Lagarde said.
“To complement its ‘fiscal compact’, the area needs some form of fiscal risk-sharing, which would allow for common support before economic dislocation in one country develops into a costly fiscal and financial crisis for the entire euro area.”
This could be achieved by the introduction of eurobonds, or of a common ‘debt redemption fund’ which allowed individual countries to borrow at individual rates, but with the assurance that repayments could come out of an emergency fund if need be.