IMF Managing Director and former French Finance Minister, Dominique Strauss-Kahn (r), with Mario Draghi, Governor of the Bank of Italy and Chairman of the international Financial Stability Board, in Brussels, March 17, 2010.

IMF's Strauss-Kahn says closer cooperation needed in Europe; Commission warns Eurozone’s four biggest countries and Ireland growth forecasts too optimistic

The global financial crisis has heightened the need for closer international cooperation, globally and in Europe, to help avoid future crises such as the one the world economy just went through, IMF Managing Director Dominique Strauss-Kahn told the European Parliament on Wednesday. Also yesterday, the European Commission warned the Eurozone’s four biggest countries - - Germany, France, Italy and Spain - - and Ireland that their economic growth forecasts for the coming three years were too optimistic.

“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 Wednesday 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 per cent 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 per cent 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 establishment of a European Systemic Risk Board and a European System of Financial Supervisors, and the European Parliament’s proposals to improve their effectiveness, hold out great promise for improving the monitoring of risk, and hence the ability to forestall crises,” he said and urged decision makers to reach agreement on the reform package soon. “Policymakers have not just the opportunity but also the duty to reshape our institutions,”he said.

He also noted that reform proposals have yet to address crisis management and resolution, in particular for cross-border banks. “In my view, Europe needs an integrated framework for crisis prevention and management, crisis resolution, and depositor protection,” he said.

Call for more international cooperation: During the crisis, it was the unprecedented extent of collaboration that saved the world from another Great Depression, Strauss-Kahn said in his closing remarks. “Now, the need for international collaboration is even greater, as we seek to create a new economic and financial landscape that delivers strong economic growth, supported by an innovative yet safe financial sector, to the benefit of all nations.”

He called on European decision makers to focus not only on improving Europe’s institutions but to also use their political influence to make sure that a global solution will emerge.

 

                                  Economic projections for 2010 (and 2011)

 

 

Country	GDP (gross domestic product) growth	Budget deficit (as % of GDP)	Public debt (as % of GDP)
France	1.4% (2.5%)	8.2% (6.0%)	83.2% (86.1%)
Germany	1.4% (2.0%)	5.5% (4.5%)	76.5% (79.5%)
Italy	1.1% (2.0%)	5.0% (3.9%)	116.9% (116.5%)
Ireland	-1.3% (3.3%)	11.6% (10.0%)	77.9% (82.9%)
Spain	-0.3% (1.8%)	9.8% (7.5%)	65.9% (71.9%)
UK	2.2% (3.3%)	12.1% (9.2%)	82.1% (88.0%

European Commission

On Wednesday, the European Commission (EC), in assessments of 14 EU  member countries - - Belgium, Bulgaria, Germany, Estonia, Ireland, Spain, France, Italy, the Netherlands, Austria, Slovakia, Sweden, Finland and the United Kingdom - - asked the four biggest Eurozone members - - Germany, France, Italy and Spain - -  together with Austria, Belgium, Ireland and the Netherlands, to detail how they intended to meet their medium-term deficit reduction targets of 3 per cent or less of GDP (gross domestic product) as required by the Euro Stability and Growth Pact. 

In respect of Ireland, which plans further fiscal adjustments of €3 billion in both 2011 and 2012, the Commission says the Government’s plans for the entire 2011-2014 period should be strengthened to avert the risk that targets might be missed.

The Commission said deficit and debt outcomes could be worse than targeted mainly due to (i) the lack of specification of the consolidation measures after 2010; (ii) the programme's favourable macroeconomic outlook after 2010; and (iii) the risk of expenditure overruns.

Even fiscally responsible Germany, which is being urged by France to boost domestic demand, has been asked to explain how planned tax cuts can be reconciled with meeting the 3 per cent of GDP annual budget deficit target and the total public debt ceiling of 60 per cent of GDP.

The UK has also been warned to cut its annual budget deficit from about £180 billion -- 12.7 per cent of GDP to 3 per cent.

Summary of the EC's assessments.

Tommaso Padoa-Schioppa, chair of "Notre Europe" at the European Parliament on Tuesday March 16th, met with Foreign Affairs MEPs to discuss their report "Charter for a New Euro-American Partnership."

"Notre Europe" chair Tommaso Padoa-Schioppa on the euro

One of the men considered to be the founding fathers of the euro currency met MEPs on the Foreign Affairs Committee on Tuesday to talk about transatlantic relations. Tommaso Padoa Schioppa was formerly on the board of the European Central Bank and now chairs the Paris-based think tank "Notre Europe". As the euro goes though choppy waters he gave the following responses to questions from the EP's press service.

You are often referred to as one of the "founding fathers of the euro"? Has the European currency fulfilled the expectations you had some 25 years ago?

My expectations on the euro have been met fully, it is an enormous success. It provides a high degree of financial stability and the European Central Bank is capable of managing the euro in times of crisis very effectively.

My expectations have not been met in the construction of other European policies, not sufficient progress has been made. So we are still in a condition where the action of the EU is insufficient. But this does not apply to the euro in any sense.

The euro and the US dollar are competing on world markets to be the leading currency. Who will get the upper hand in the long term?

Well, the outlook of the currency system in the long-term is very uncertain. I think that as the world becomes more global and has a number of very big economic actors it is increasingly difficult for the currency of just one country or one region to be the world currency. This is true for the dollar but it would be even true for the euro.

So what is necessary is to develop a new form of international monetary cooperation which is however entirely to be invented, we are still very far from that.

There are still many sceptical voices saying that the euro will eventually fail. Is this a lack of faith or are there real risks which may endanger the common currency?

I  think that nobody really thinks that the euro is in any sense in danger. There are of course, in a very wide debate, always various voices, but I see nobody with authority who predicts anything like that and I do not see any sign of that.

On the contrary I see that precisely in this moment there is a growing awareness of the fact that the euro is a common element of strength to which everybody is committed to.