Euro debt crisis - Lagarde call challenges EU to act

The global economy has entered a dangerous new phase according to Christine Lagarde, managing director of the International Monetary Fund (IMF).

She has been critical of her former European colleagues for not talking with a single voice to save the euro.

In recent speeches, she has been warning that the austerity that Europe has been imposing on Greece and other countries in financial difficulties has been counter productive because it is stifling economic growth.

Financial ministers need to agree on requirements for euro membership and decide if those countries unwilling to live up to those requirements belong in the euro. Forcing the countries with emerging economies to retrench economically will impact on demand from those countries with advanced economies. Imposing austerity on Greece and other debt-weakened countries will choke economic growth.

Whether people agree or disagree with Ms Lagarde, she has certainly challenged people to reconsider. In some respects she has also contradicted some of her pronouncements as finance minister of France.

Earlier this year she stated that European banks were “solid and healthy” and actually called for tax increases and spending cuts in countries that were already so weak that they needed financial bailouts. Since then, she has ruffled many feathers with her outspoken comments in taking her European colleagues to task for not adopting a single voice to save the euro.

The primary basis of education has always been the three Rs, but she has now come up with a new set of four Rs of a policy for collective action to stimulate global economic recovery. She has called for repair, reform, rebalancing and rebuilding.

The repair being advocated is to relieve balance-sheet pressures on countries, households and banks, because they risk smothering the economies. Demanding weaker economies to consolidate too quickly will undermine recovery and damage job prospects.

In this country, we should be asking if the banks have done enough in relation to sovereign debt and the household debt crisis. There is plenty of scope for banks to adopt an imaginative approach, especially in developing a coherent policy in relation to the hundreds of thousands of young people mired in negative equity.

The financial sector must be reformed, including the regulatory process, but the new arrangements should be phased-in to avoid excessive arbitrary regulations.

In advocating rebalancing, Ms Lagarde has suggested that emerging economies should be facilitated to take up the slack in demand in order to drive the global economy.

The emerging economies can provide the demand that inevitably stimulates the advanced economies. But if the advanced economies succumb to recession or depression, everyone will be doomed economically.

The fourth pillar of recovery — rebuilding financial structures and strengthening budgetary positions — will be best achieved by fostering the collective action of the 187 members of the IMF. The path to sustained recovery requires strong political will, international co-operation, and positive action.