IMF Managing Director Christine Lagarde made an impassioned plea for governments to “finish the job” of putting its financial house in order to staunch the bleeding from the accelerating crisis in Europe. The euro and the European project are now facing an existential crisis. Without clarity and decisive leadership at this historic moment, Europe may fail, bringing the global economy down with it.
Speaking at an Atlantic Council – Suddeutsche Zeitung Leaders’ Dialogue dinner in New York on Friday evening, she emphasized the crucial role of the financial sector plays in driving the growth of the real economy and underlined that a lack of transparency and predictability in the financial sector is worsening the ongoing crisis of confidence plaguing Europe and by extension the world. As she put it, “Five years into the crisis, where are we in terms of our goal? Unfortunately, I have to be blunt. We are still a great distance from our final destination. And, with the stakes rising by the day, we stand at a crossroads. Policymakers need to lay out and follow a clear roadmap of how to finish the job.”
In the aftermath of elections in both France and Greece, where voters convincingly rejected the political parties calling for further austerity, global financial markets have once again turned against Europe. Though the injection of massive amounts of money into the financial sector by the European Central Bank earlier this year placated the markets for a time, a lack of clarity and sense of urgency from Europe’s leaders tested the patience of investors.
This is perhaps most evident in Spain, Europe’s fourth largest economy, where sovereign borrowing rates have inched worryingly close to the 7 percent mark which forced Greece, Ireland, and Portugal into IMF-EU assistance packages. Just this weekend, Spain finally asked for (and was granted) an urgently-needed bailout of approximately 100 million euros for its financial sector. Importantly, this money is to be invested directly into the banks themselves—rather than the Spanish government—therefore allowing Madrid to escape invasive oversight of its finances by the Troika (IMF, European Commission, and ECB). Given that new Prime Minister Mariano Rajoy had unnecessarily staked the entire legitimacy of his government to the fact that Spain would not need sovereign assistance, this distinction is crucial.
Lagarde stirringly called upon European and global leaders to act proactively, rather than allowing the marketplace to dictate policy moving forward: “Yes, the responses to date have been bold, but they have been usually reactive, rarely proactive; more partial than complete. We know from history that, at times of deep uncertainty, policymakers need to lead markets with their actions, rather than allowing market fears to lead policies. We must act upon this lesson now.”
It’s true that many of the actions taken by the European Union would have been unthinkable even a few short months ago. From the signing of the Fiscal Pact legally limiting European states to a fiscal deficit of 3% of GDP—a figure almost no eurozone country currently complies with—to the creation of the European Financial Stability Facility and European Stability Mechanism bailout funds, Europe’s leaders have gone integrated far further than most of them would have liked to. This underscores Josef Ackermann’s point made recently at the Council that perhaps the financial markets have done Europe a favor by forcing them to integrate their finances quicker than they would have liked. Still. Lagarde is correct to press for Europe to go farther, faster.
Lagarde declared that, “The policy debate needs to move beyond the false dichotomies of growth versus austerity, stability versus opportunity, national versus international interests. We need to agree on a comprehensive strategy that is good for stability and good for growth. We need coordinated action to support that strategy. And we need it now.”
Germany and its fellow creditor nations are right to insist on labor market reforms to open up closed professions and give young people access to jobs. At the same time, nations need to be given an adequate amount of time for these reforms to bring public debt levels down. Countries experiencing severe recessions should be held accountable for implementing reforms, regardless of whether or not specific fiscal targets are met.
Only by laying out a clear roadmap for the future can Europe’s leaders bring an end to the vicious financial cycle which has brought the continent back to the brink of recession. In the long-term that plan must include a cross-border deposit insurance scheme, an international banking resolution authority, and oversight of the financial system at the European level. In the meantime, however, markets are watching for signs that Europeans are finally taking this crisis as seriously as they should be. For better or worse, that primarily means Chancellor Merkel and her government in Berlin for the moment. Christine Lagarde may have been speaking to a distinguished audience in New York City, but it’s clear that her calls to finish the job and define the way forward were aimed squarely at Germany.
Whether they choose to accept it or not, the reality is that the sovereign debt crisis is now calling the entire European integration project into question. A mounting divide between Northern and Southern Europe is creating societal and economic tensions without historical precedent in the brief history of the European Union. Additionally, the growing democratic deficit can no longer be ignored. Europe—and the world—need a new narrative which clearly articulates the many benefits of European integration and the common currency. Most notably, German Chancellor Angela Merkel needs to spell out to her people that Germany has benefitted most of all from the introduction of the euro, and should be prepared to invest its riches in the future of its neighbors.
Garrett Workman is assistant director of the Atlantic Council’s Global Business and Economics program.