U.S. Treasury Secretary Timothy F. Geithner said Europe has finally crafted a policy armory that’s robust enough to beat back the sovereign debt turmoil hampering global economic growth.
The region has a “much more viable strategy to hold the system together,” Geithner said at a banking conference today in Tokyo, where he is attending the annual meetings of the International Monetary Fund and World Bank. “It’s a much more powerful, promising path.”
Even as he warned the euro area faces a “multi-year challenge,” calling it the chief threat to the world economy, Geithner’s comments mark a reversal from last year’s IMF talks at which he warned Europe’s lackluster policy response left it prone to “catastrophic risk.”
Three years to the month since Greece’s budget woes set off a crisis now engulfing Spain, euro-area governments have a 500 billion-euro ($643 billion) permanent rescue fund and a vow from the European Central Bank to help purchase bonds from stressed sovereigns. They are also working on a banking union and closer fiscal ties.
“They are better off today than they were before they reached agreement,” Geithner said at the Institute of International Finance conference. “The basic strategy is right and good.”
Europe’s financial strains are again the central challenge facing the IMF’s 188 members, two days after the Washington-based lender said failure to remedy them was helping create an “alarmingly high” risk of a steeper slowdown in the world economy.
“The debt and financial sector problems in Europe pose the biggest downside risk to the global economy” Japanese Finance Minister Koriki Jojima said today. “Europe must make its own efforts to prevent the spread of the crisis and to stabilize the market.”
The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said two days ago, compared with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013.
IMF Managing Director Christine Lagarde today said Greece should get two more years to meet fiscal targets and suggested debt reductions are needed before a 130 billion-euro bailout can proceed.
“It’s sometimes better to have a bit more time,” she told reporters. “This is what we advocated for Portugal, this is what we advocated for Spain and this is what we are advocating for Greece.”
Arriving in Tokyo, German Finance Minister Wolfgang Schaeuble declined to comment on Lagarde’s call before the review of the Greek situation is published by the IMF, European Commission and ECB. Still, he said suggestions the official sector restructure its Greek debts are not a solution.
The euro-area’s success in implementing reforms is being underestimated, he said, citing declines in budget deficits and improvements in competitiveness.
“We have made more progress than one would think” when looking at the headlines, Schaeuble said.
Spain now sits in the sights of investors as the fourth-largest euro economy mulls whether to accept the conditions that will trigger a bailout and the ECB’s bond buying. The country’s debt rating was cut yesterday to one level above junk by Standard & Poor’s, which cited mounting economic and political risks as the government considers a second bailout.
In Tokyo today, Geithner said it was for Europe to decide on the IMF’s role. Lagarde indicated to Bloomberg Television yesterday that the fund doesn’t need to lend money to Spain to help the country.
“Some people say unless you have skin in the game, meaning money, you are not really respected, you are not heard,” Lagarde said. “I am not so focused on that as I am on the monitoring.”
As he prepares to step down as Treasury chief, Geithner said it was not a “responsible” strategy for U.S. policy makers to delay a decision on how to deal with the $600 billion in government spending cuts and tax increases which loom at year end unless the law is changed.
A pact that allows for deficit reduction over time and opens up room for investment in the shorter-term would leave the U.S. with “the potential to grow significantly faster,” he said. “We’re going to take a run at it.”