IMF Survey: Lagarde Calls For Urgent Action So 2012 Can Be ‘Year of Healing’
IMF News, January 23, 2012
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- Published: January 23, 2012
Overview
- IMF Managing Director Christine Lagarde called for urgent collective action to prevent a downward spiral in the world economy and said “2012 must be a year of healing.”
- Europe is identified as the center of global concerns and needs stronger growth, larger firewalls, and deeper integration.
- The IMF said it was ready to help and was seeking to increase its lending resources by up to $500 billion.
- The IMF estimates that in coming years, additional global financing of potentially $1 trillion could be needed.
- Eurozone countries have already pledged to provide up to $200 billion in new financing for the IMF.
IMF financing and cooperative approach
- Goal: “step up the Fund’s lending capacity” to supplement resources Europe will provide and to meet needs of other countries affected by the crisis.
- IMF estimate of additional global financing potentially needed: $1 trillion.
- IMF target to boost its lending resources by up to $500 billion.
- Eurozone pledge toward IMF financing: up to $200 billion.
- Emphasis: “A cooperative path means that all countries must work together with a common diagnosis toward a common solution.”
Europe — Three imperatives to restore confidence
- Three imperatives Lagarde identified: stronger growth, larger firewalls, and deeper integration.
- Stronger growth
- Concern: euro area economy slowing sharply and inflation already declining, creating risk it will fall well below target next year and raise debt burdens.
- Policy recommendations:
- Additional and timely monetary easing to reduce deflation risk.
- Prevent banks from contracting credit under market pressure by focusing on raising capital levels rather than cutting back lending to boost capital ratios.
- Fiscal policy: recognize that some countries must tighten sharply and quickly while “there is a large core where fiscal adjustment can be more gradual.”
- Structural reforms to boost competitiveness and long-term growth.
- Larger firewalls
- Rationale: without a larger firewall, fundamentally solvent countries like Italy and Spain could be forced into solvency crises by abnormal funding costs.
- Policy recommendations:
- Fold the EFSF into the ESM, increase the size of the ESM, and identify a clear and credible timetable for making it operational.
- ECB action to provide necessary liquidity support to stabilize bank funding and sovereign debt markets.
- Break the vicious cycle of banks hurting sovereigns and sovereigns hurting banks by restoring adequate bank capital levels and restoring confidence in sovereign debt.
- Deeper integration
- Short-term proposal: a pan-euro area facility with capacity to take direct stakes in banks to help break the bank–sovereign link.
- Further financial integration measures: unified supervision, a single bank resolution authority, and a single deposit insurance fund.
- Fiscal integration: “The euro area also needs greater fiscal integration—it is not tenable for seventeen completely independent fiscal policies to sit alongside one monetary policy.”
- Complement the “fiscal compact” with some form of fiscal risk-sharing; financing options include creation of euro area bonds or bills or a debt redemption fund as proposed by the German Council of Economic Advisors.
Role of other major economies
- United States
- Has special responsibility as the world’s largest economy and center of the global financial system.
- Recommendations: relieve household debt burdens through programs to make mortgage debt sustainable and act decisively to bring down tomorrow’s deficits without bringing down today’s economy.
- Japan
- As the world’s third largest economy, should put in place a credible plan to bring down public debt and undertake reforms to raise long-term growth.
- Emerging and advanced countries with large current account surpluses (including China)
- Should encourage more domestic demand to support global growth.
- Specific recommendation for China: continue to shift growth away from exports and investment toward consumption.
Key messages and quotations
- “The longer we wait, the worse it will get. The only solution is to move forward together. Our collective economic future depends on it.”
- “We must all understand that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral.”
- “Now the world must find the political will to do what it knows must be done.”
IMF Survey: Lagarde Calls For Urgent Action So 2012 Can Be ‘Year of Healing’
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