IMF’s Christine Lagarde calls for “rainy day fund” for Eurozone
The powerful head of the International Monetary Fund (IMF) today called on Eurozone countries to establish a “rainy day fund” to protect against economic crises.
Christine Lagarde, the IMFs managing director, today said the Eurozone should create a “central fiscal capacity” able to step in and support governments when economic crisis hits and tax revenues fall.
The current Eurozone system has “gaps” which were revealed during the financial crisis and subsequent European debt crisis, said Lagarde – who many EU observers peg as a prime candidate to become the next head of the European Commission, the blocs powerful executive arm.
Read more: Lagarde: "Why not" turn EU bailouts into a European Monetary Fund?
The debt crisis, which began in 2009, caused political upheaval in the Eurozone as investors fled the sovereign debt of countries they believed might be forced to leave the euro. Greece was forced to slash government spending because of pressure from Eurozone creditor nations such as Germany.
German opposition would likely make a shared fiscal fund difficult politically, but Lagarde, a former French finance minister, said that the austerity policies to raise taxes and cut spending “contributed to a double-dip recession” in the Eurozone. A central fund would build up assets in good times to prevent panic the next time a recession hits, she said.
“Depending on the depth of a downturn countries would receive transfers to help them offset budget shortfalls,” Lagarde said.
Read more: Broad-based growth in Eurozone confirmed after boom year
“In extreme circumstances, the fund would be allowed to borrow. However, any borrowing would be repaid by members future contributions.”
Such a fund could reduce the negative effects on output from an economic shock by more than half, according to IMF analysis also published today.
Lagarde said the European integration project is only “half-finished”, pointing to migration policies, defense and energy energy policies as “missing pieces”of the integration puzzle, alongside completing the work of capital markets and banking unions which aim to create a single financial market across the EU.
Read more: EU to announce new plans to further integrate markets this week
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