Reuters: Europe pressed for action to end debt crisis

22 April 2012

Global finance chiefs pressed Europe in weekend talks to put in place quickly the economic reforms needed finally to extinguish its debt crisis now that newly increased financial buffers have bought some precious time.

A day after advanced and emerging countries agreed to double the firepower of the International Monetary Fund to help contain the crisis, the IMF's governing panel said on Saturday that the 17-nation euro area must cut government debt burdens further, push bold economic reforms and stabilise financial systems. Debt problems will resurface and growth will stumble unless these steps are taken, the head of the IMF's governing panel, Singapore's finance minister, Tharman Shanmugaratnam, warned.

The euro area, the world's second-largest economic bloc, has already slipped into a mild recession, weakening its major export partner, China, and other parts of emerging Asia, while growth in the United States remains sluggish. Unless stronger growth is restored and investor confidence returns, the IMF and finance chiefs from around the globe said the world will not break out of a vicious debt-driven cycle.

"What was really critical in all our minds was to get back to normal growth over the medium term and preferably sooner rather than later, in other words within two to three years", Tharman said at a news conference on Saturday. "If we don't get back to normal growth, if we don't get GDP back to its potential levels, then fiscal sustainability is not possible either", he warned.

It was Europe that the IMF panel singled out for policy advice. It stressed that budget consolidation must be balanced to avoid overly harsh cuts that undermine growth and make deficits even worse - a tricky act that Italy and Spain are currently facing.

"There has been a big discussion about how to make it possible to have fiscal strengthening and growth", said Italy's deputy finance minister, Vittorio Grilli. While the timing matters, fiscal tightening must come first, he said.

The panel, made up of finance ministers who advise the IMF on policy, called upon major central banks to help by keeping interest rates low and monetary stimulus in place, as long as growth remains weak and inflation under control.  A call by the IMF for lower eurozone interest rates, however, met resistance from some ECB policymakers in Washington. Germany in particular is concerned that loose monetary policy will stir inflation, and argued it is no panacea for budgetary woes.

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