Euro is not in danger, IMF chief says

December 17, 2010

Yesterday,  IMF Managing Director Dominique Strauss-Kahn sat down with Chrystia at the Newseum in Washington, D.C., for an hour-long Newsmaker interview. The European sovereign debt crisis dominated most of the conversation. The IMF chief admitted that the situation “worried” him and that he wanted Europeans to find a more “comprehensive” solution:

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Well, I’m worried. And that’s why I’m urging the Europeans — I just attended the Euro Group meeting, which is the group of the finance minister of the eurozone — two weeks ago. I’m urging for the European Union to provide a comprehensive solution. Because this piecemeal approach, which the deal with Greece — as was Ireland after, and maybe another country later on — obviously doesn’t work. And the markets are just waiting for what’s next …  The institutions are still thinking too local when they’re facing global problems.

A more comprehensive solution will require better coordination among national European governments.  As Strauss-Kahn said, “You can’t have a single currency, especially in times where you have troubles, without having more coordination in economic policy.” Two concrete proposals the managing director endorsed were stronger stress tests for the banking sector and an increase in resources for the European Financial Stability Facility, the European bailout fund.

Although the euro has fallen in recent weeks on speculation that some battered members of the eurozone might be forced out, the IMF chief assured Chrystia that the euro is a resilient currency that will survive this period of panic:

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It’s a strong currency, which behaved during the last ten years better than even the deutschemark in the previous decade. I see absolutely no reason — I see many reasons why there may be a problem in the eurozone in terms of growth — unemployment, even beyond unemployment, social problems, because the question is a very difficult question to solve in the coming 10 years. But that doesn’t mean at all that I see any threat to the euro. Any solution other than the euro would be worse for the eurozone members.

When Chrystia asked whether the EU-IMF rescue package for Ireland would work, Strauss-Kahn replied with an emphatic “yes:”

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He did concede that the austerity conditions of the rescue package will make the lives of many Irish citizens more difficult. While the alternative solution — forcing the creditors of Ireland’s crisis-stricken banks to shoulder more of the bad bets which are weighing down the economy — is popular, Strauss-Kahn said such proposals were “not responsible” because they would invite contagion:

The role of Ireland in the shadow banking system, also in the official banking system is much bigger than the size of its economy. The Irish economy is more or less one percent of the union’s GDP, which is not that much. But the consequences of what’s happening to the Irish bank has a lot of influence and spillover in the rest of the world, including German banks, including French banks, and obviously [the] U.K.  So I wanted absolutely to say that when some are messing up in the banking sector … the losses of the bank should not be totally paid by the taxpayer. Fair enough.  On the other hand, if you don’t take into account the possibility or the risk of contagion, how about putting in some place some haircut that will have to go to other countries, and, finally, put the other countries which are somewhat at risk in a situation where it will be impossible for them to find any funding. If you don’t take this into account, it’s just not responsible.

Posted by Peter Rudegeair.

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