Restoring Confidence Crucial to Rebuilding World Recovery

SUMMARY

Rapidly restoring confidence in both Europe and globally is crucial to protecting the battered international financial system and rebuilding the ailing recovery, threatened particularly by strains within the euro zone, panelists at a discussion on the global economic outlook say in Davos.

 
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  • No country immune from current crisis, says Lagarde
  • Need to build firewalls to restore confidence
  • Countries must tailor their budget responses to individual situation
  • “No one is immune in the current situation. It’s not just a euro zone crisis. It’s a crisis that could have collateral effects, spillover effects around the world,” IMF Managing Director Christine Lagarde told a panel discussion at the World Economic Forum.

    To get beyond the crisis, she said Europe must address three key issues—lack of growth, reduced competitiveness, and the need for greater integration. To restore confidence more immediately, the euro zone must develop a strong firewall to protect its members.

    “It is critical that the euro zone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the euro zone so that the financing needs of that zone can actually be met."

    So big “it won’t need to be used”

    In addition, the IMF’s resources should be built up to help protect other countries around the world. The aim, she said, is to build up a big enough contingency fund that will help restore confidence and therefore it won’t have to be used.

    Lagarde is trying to ramp up the IMF’s resources by up to $500 billion so it can help if more lending is needed in Europe or elsewhere. She stressed that the money is not just to support Europe, but “any country that is a member of the IMF,” particularly in central and eastern Europe, and poorer developing countries.

    Quoting British wartime leader Winston Churchill, she said “We have the tool[s], we must do the job.”

    Tailor made

    She clarified that there was not a “one-size fits all solution” in the current crisis. Efforts to reduce budget deficits and debt must be tailored to the situation in each country as consolidating too quickly could strangle growth. “We are not suggesting that there should be fiscal consolidation across the board, without differentiation and without specific treatment adjusted to the specificities of the country,” Lagarde noted.

    In the context of discussing the IMF’s broader position on fiscal policy, she set out three main country groupings—those with no choice but to adjust debt levels and spending now, those with room for flexibility, and those who have the option to stimulate growth further, and thereby help other economics.

    The IMF has said that the euro zone countries are expected to fall into a mild recession...

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