Lagarde urges Europe to boost growth

24 Jan 2012, 7:09 am   -   Source: AAP
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(AP)

(AP)

The head of the International Monetary Fund says Europe's stronger economies should do more to boost growth and beef up defences against the debt crisis.

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Europe's stronger economies should do more to boost growth and beef up the defences against the continent's debt crisis, the head of the International Monetary Fund says.

After meeting with German Chancellor Angela Merkel on Monday, Christine Lagarde urged the leaders of the 17 countries that use the euro to deal with a crisis that's threatening another recession in the eurozone and remains the biggest risk to the global economic recovery.

"There are three imperatives - one is stronger growth, two is larger firewalls; three, deeper integration," she said in a speech to the German Council on Foreign Relations.

"Resorting to across-the-board, across-the continent, without differentiation, budgetary cuts will only add to recessionary pressures."

Lagarde, a former French finance minister, suggested that some of the stronger economies in the eurozone could deal with their own debts in a less aggressive way so they can shore up economic growth.

"Several countries have no choice but to tighten public finances, sharply, quickly, without compromising," she acknowledged. "But this is not true everywhere in the zone. There is a large core where fiscal adjustment can be more gradual."

Germany, which has had to foot a large chunk of Europe's bailouts, has put austerity at the heart of the eurozone rescue effort and is reluctant to put more money into rescue funds.

Merkel and French President Nicolas Sarkozy have both stressed this month that boosting growth in the 17-nation eurozone is a priority - though Germany, the region's biggest and strongest economy, still insists on strict budget discipline.

Like Merkel, Lagarde underlined the importance of countries pushing through structural reforms to boost their competitiveness and growth potential.

But she was outspoken on the need for a larger eurozone firewall, pointing to the risk that Italy or Spain "could potentially be forced into a solvency crisis by abnormal financing costs".

Those two countries are far bigger than Portugal, Ireland and Greece, which have received bailouts, and are considered too big for the eurozone's already-planned firewalls to handle.

Lagarde advocated increasing the size of the eurozone's permanent rescue fund, the 500-billion-euro ($A617 billion) European Stability Mechanism, which is supposed to start work in July.

She called for "adding substantial real resources", in part by folding into the ESM what remains of the current, temporary 440-billion-euro ($A543 billion) European Financial Stability Facility. That isn't currently planned.

Lagarde didn't specify by how much the ESM should be bolstered, but did call for a "clear and credible timetable" for getting it up and running.

She said action by the European Central Bank "to provide the necessary liquidity support to stabilise bank funding and sovereign debt markets would also be essential".

The ECB has provided huge long-term loans to the eurozone's banks, but has been extremely reluctant to step up its limited program to buy government bonds, a program already viewed with suspicion by many in Germany.

Merkel's spokesman, Steffen Seibert, told reporters Germany does not currently see the need to increase ESM funding, but the chancellor was "prepared to talk about whatever our European partners bring to the negotiating table in Brussels".

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