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Closer Policy Coordination Needed in Europe

Industrial trade fair in Hanover: Countries in Europe will need to rebalance their economies, according to IMF chief Dominique Strauss-Kahn (photo: Reuters)

EUROPE AFTER THE CRISIS

Closer Policy Coordination Needed in Europe

IMF Survey online

March 17, 2010

  • IMF chief calls for closer policy coordination after global crisis
  • Critical task in many countries is to bring public debt down without jeopardizing growth
  • Financial stability frameworks should be made more robust

The global financial crisis has heightened the need for closer international cooperation, globally and in Europe, to help avoid future crises such as the one the world economy just went through, IMF Managing Director Dominique Strauss-Kahn told the European Parliament.

“I fear that as financial markets bounce back and economic growth resumes, the determination to make lasting changes is already receding,” Strauss-Kahn told more than 120 members of the European and national EU parliaments, who met in Brussels on March 17 for the annual meeting of the European Parliament’s Committee on Economic and Monetary Affairs.

Greater policy coordination, on issues ranging from fiscal policy to financial sector regulation, was needed to make Europe’s institutions stronger, more resilient to crisis, and hence better able to promote growth and prosperity, he said.

The IMF is forecasting GDP growth of 1 percent for the European Union in 2010.

Fiscal policy will be key

In many countries, the most critical task is to bring public debt back to sustainable levels and thus alleviate serious concerns about macroeconomic stability, Strauss-Kahn said in remarks prepared for delivery. This is no easy task: in the advanced economies, public debt is set to rise to an average 110 percent of GDP by 2014, about 35 percentage points higher than before the crisis.

“What we need now are strategies that can restore fiscal sustainability, but that do not jeopardize the economic recovery by withdrawing support too soon,” he said. Key elements of such strategies include strengthening fiscal institutions and reforming health and pension entitlements.

In search of new sources of growth

Countries in Europe also needed to rebalance their economies. While the specific changes will vary from country to country, all countries will need to identify new sources of growth, Strauss-Kahn said.

In economies that have been running persistent current account deficits, domestic saving must increase. Exports will need to contribute more to growth in such countries. In economies with persistent current account surpluses, domestic demand must go up, including by boosting consumption. This adjustment will require improving productivity and greater labor market flexibility, he said.

A more resilient financial system

Financial markets have staged an impressive comeback, but this did not necessarily mean smooth sailing going forward. More work was needed to cement the solid progress Europe has made toward a new cross-border financial stability architecture, Strauss-Kahn noted.

“The envisaged establishment of a European Systemic Risk Board and a European System of Financial Supervisors, and the European Parliament’s proposals to improve their effectiveness, hold out great promise for improving the monitoring of risk, and hence the ability to forestall crises,” he said. He urged decision makers to reach agreement on the reform package soon. “Policymakers have not just the opportunity but also the duty to reshape our institutions,” he said.

He also noted that reform proposals have yet to address crisis management and resolution, in particular for cross-border banks. “In my view, Europe needs an integrated framework for crisis prevention and management, crisis resolution, and depositor protection,” he said.

Call for more international cooperation

During the crisis, it was the unprecedented extent of collaboration that saved the world from another Great Depression, Strauss-Kahn said in his closing remarks. “Now, the need for international collaboration is even greater, as we seek to create a new economic and financial landscape that delivers strong economic growth, supported by an innovative yet safe financial sector, to the benefit of all nations.”

He called on European decision makers to focus not only on improving Europe’s institutions but to also use their political influence to make sure that a global solution will emerge.