IMF Chief Warns Europe Must Fuel Growth
WSJ: BERLIN—The head of the International Monetary Fund warned that in addition to cutting yawning budget deficits Europe needs to do more to promote growth and stop the crisis from spreading to the world economy.
"It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand," IMF Managing Director Christine Lagarde said before the German Council on Foreign Relations. "A moment, ultimately, leading to a downward spiral that could engulf the entire world," she said.
Ms. Lagarde has made similar warnings before, but the statements Monday come as Greek debt talks have hit a roadblock and Europeans are growing weary of deep public-spending cuts. The remarks in Berlin also came as across town Germany Chancellor Angela Merkel in a news conference rejected calls to discuss a massive expansion of Europe's bailout funds.
The opposing positions held by Ms. Lagarde and Ms. Merkel clearly demonstrate where the fault line lies in the debate in Europe, just over two years since the beginning of a crisis that threatens to split the euro zone and severely damage the global economy. On the one side of the argument is Germany with its belief that Europe needs to fix the broken rules of its monetary union and make deep cuts in public spending to preserve the euro. But others, like Ms. Lagarde, warn Europe's austerity cure could itself destroy the euro by exacting irreparable damage on Europe's weakest members.
"There are three imperatives—one is stronger growth, two is larger firewalls; three, deeper integration,'' Ms. Lagarde said. "Resorting to budget cuts across-the-board, across-the-continent, without differentiation, will only add to recessionary pressures."
Germany has been under increasing pressure to back a significant expansion of the planned European Stability Mechanism, a permanent bailout fund with a planned capacity of €500 billion ($644 billion) that European leaders hope to launch in July. The ESM is being set up to succeed the euro zone's temporary bailout fund, the European Financial Stability Facility, which has a capacity of €440 billion. The bulk of the money in the temporary fund has already been spent on aid programs for Greece, Portugal and Ireland.
Ms. Lagarde called for folding the remaining capacity of the EFSF, about €250 billion, into the ESM, which would boost the permanent bailout fund to €750 billion. Germany, while not ruling it out, has said current funding for the ESM is sufficient adding it wants to complete talks on the fiscal pact and the ESM treaty first and talk about future funding for the permanent bailout fund in March.
Concern is growing in Europe that previous programs to help Greece reduce its debt load will fail, and that Athens will default on its debt. A Greek default could send shock waves through the euro zone with the potential of damaging large economies such as Italy. To prevent so-called contagion from spreading, possibly infecting the global economy, some European leaders and the European Central Bank say Europe must put up stronger firewalls, starting by boosting the capacity of the planned permanent bailout fund.
Germany's position is that putting up more money for a bailout fund would take the pressure off countries that have in the past run up massive deficits, encouraging them to slow austerity efforts.
Without mentioning Germany by name, Ms. Lagarde suggested it would be easier for the weaker euro-zone countries to cut their budget deficits if stronger countries in the 17-nation euro zone slow efforts to cut debt and allow their economies to grow faster, helping to boost the euro-zone periphery. Ms. Lagarde was touching on an issue that has accompanied the debate over the euro zone's problems from the start. While Germany runs a large trade surplus, weaker countries in Europe are running trade deficits. If Germany slowed its own debt-cutting drive, it could fuel growth in weaker European countries.
"Several countries have no choice but to tighten public finances sharply, quickly, without compromising," said Ms. Lagarde. "But this is not true everywhere in the euro zone. There is a large core where fiscal adjustment can be more gradual."
Write to William Boston