Closer Policy Coordination Needed in Europe

"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...