International Monetary Fund Managing Director Christine Lagarde urged European policy makers to implement their plans to save the euro, including the formation of a banking union, as the fund prepares to lower its global growth forecasts.
Uncertainty over the ability of policy makers around the world to deliver on their promises is weighing down on the global economy, Lagarde said in prepared remarks for a speech in Washington today. While the euro region is where action is the most urgently needed, the U.S. also poses a “major risk” through the fiscal tightening that may take place next year, she said.
In the euro region, “markets have been buoyed,” Lagarde said. “Now they want to see coordinated implementation -- multiple players playing one game.”
“This will require euro area leaders to deliver on their June 29 commitments -- establishing a single supervisory mechanism and enabling the direct recapitalization of banks.”
Lagarde’s remarks reflect concerns that Europe may yet again miss a chance to halt its debt crisis even after European Central Bank President Mario Draghi pledged to buy government bonds in exchange for strict conditions. German Chancellor Angela Merkel and French President Francois Hollande disagree on a timetable for starting joint oversight of Europe’s banking sector, while Spain is resisting asking for aid and Greece has been unable to meet its bailout conditions.
Draghi has said his plan to regain control of interest rates in the euro area and save the euro will need IMF help to draft and monitor conditions attached to it. The fund has co-financed aid packages to Greece, Ireland and Portugal and is helping keep track of a rescue of Spain’s banks.
The IMF still expects a “gradual recovery,” though it now sees global growth “a bit weaker” than it had forecast in July, Lagarde said. The fund then expected growth of 3.5 percent this year and 3.9 percent in 2013.
In the U.S., implementing fiscal cuts that would be part of a current law if no agreement is reached on how to reduce the country’s debt would reduce growth by as much as 2 percent, she said.
“We all recognize that political calendars impact the timing of key decisions,” Lagarde said. “But the current uncertainty presents a serious threat for the United States and, as the world’s largest economy, for the global economy.”
Emerging markets are now also feeling a slowdown, which for some may call for additional stimulus measures or a halt to fiscal and monetary tightening, Lagarde said. The IMF is ready to offer precautionary financial support, she said at the Peterson Institute for International Economics.