Call to action
January 23, 2012
The managing director of the International Monetary Fund used a speech in the German capital on Monday to warn of dire consequences should Europe's stronger economies fail to do enough to head off the eurozone's sovereign debt crisis.
Speaking at the German Council on Foreign Relations think tank in Berlin Christine Lagarde said that the crisis, which could lead to a recession in the eurozone, was a threat not only for Europe, but was also the biggest current risk for the global economy.
"It is not about saving any one country or any one region. It is about saving the world from a downward economic spiral," The former French finance minister said. "It is about avoiding a 1930s moment ... in which a combination inaction, insularity, and rigid ideology could cause a collapse of global demand."
She said that if Europe is to going to grips with the crisis it will need to create stronger growth, bigger firewalls, and deeper integration.
Among the specific measures she called for were an increase in funds for the eurozone's future, permanent rescue fund and so-called "eurobonds," both ideas that are opposed by Europe's biggest economy, Germany.
Temporary and permanent funds
"We need a larger firewall," Lagarde said. "Without it, countries like Italy and Spain that are fundamentally able to repay their debts could be forced into a solvency crisis by abnormal financing costs."
She suggested "folding" whatever cash was leftover in the temporary eurozone rescue fund, the 440-billion-euro ($570-billion) European Financial Stability Facility, into the permanent bailout fund, the European Stability Mechanism (ESM).
The 500-billion-euro ESM is expected to come into force sometime later this year, but Lagarde called for a "clear and credible" timetable to get it up and running. However she made a point of rejecting a suggestion reportedly made by Italian Prime Minister Mario Draghi, that the ESM should be doubled.
The case for eurobonds
The Lagarde also pushed the idea of increased risk-sharing across its borders, something that has become known as eurobonds.
"Political agreement on a joint bond to underpin risk sharing would certainly deliver a strong message to markets that the euro area members are very serious about their long-term future," Lagarde said.
The IMF is to release its updated economic projections for 2012 on Tuesday, which Lagarde said would include "lower growth forecasts for most parts of the world."
Author: Chuck Penfold (AP, AFP, Reuters)
Editor: Nancy Isenson