“A Compass to Prosperity: The Next Steps of Euro Area Economic Integration”
Photo Credit: www.al-tax.org
March 26, 2018/IMF
Christine Lagarde, the IMF’s Managing Director, delivers keynote remarks on the urgency of completing the euro area architecture before the next crisis.
➢ Ms. Lagarde outlined her vision for the euro area going forward: “A more unified euro area can be a compass to prosperity for the region and a beacon of hope to the world. It can be a source of global economic stability and proof that international cooperation can still deliver… to be an effective compass, it cannot only be an economic union of convenience in calm waters.”
➢ Citing new IMF research, Ms. Lagarde explained how a euro area central fiscal capacity could reduce the impact of another crisis by 50 percent: “… the paper analyzed the case of a large euro area-wide shock when monetary policy is constrained. It found that for a relatively modest cost — 0.35% of GDP per year — a central fiscal capacity could reduce the negative effects on output by more than 50 percent.”
➢ Ms. Lagarde explained how a euro area central fiscal capacity would work: “Our paper proposes creating a “rainy-day fund” that countries contribute to each year to build up assets in good times. Then, depending on the depth of a downturn countries would receive transfers to help them offset budget shortfalls. In extreme circumstances, the fund would be allowed to borrow, however any borrowing would be repaid by members’ future contributions… it will be a temporary cushion and not a permanent pillow. Our suggested approach requires members to take greater responsibility for putting their own houses in order.”
➢ Ms. Lagarde underscored the need to complete the rest of the architecture: “…the euro area does have a necessity today. It is the necessity of filling in the missing pieces of the architecture so the region is prepared for the next crisis. Sooner or later, the next downturn will come and the need for a good compass will quickly become apparent.”
➢ Ms. Lagarde encouraged moving forward on the capital markets and banking union to strengthen resilience in the face of a future crisis: “The upcoming June European Council meetings provide an excellent opportunity … to take the next steps on the banking union. One encouraging sign is that there appears to be broad support for a common backstop to the Single Resolution Fund. Agreement on a schedule for common deposit insurance, together with a roadmap for reducing vulnerabilities in the banking sector, would be an even bigger move in the right direction.”
➢ Ms. Lagarde concluded by calling for more unity in the challenging days ahead: “At a moment when multilateralism is being challenged around the world, many are looking to countries in Europe to show that cooperation can translate into economic security.”