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Abu Dhabi, UAEWednesday 20 June 2018

IMF's Lagarde urges euro bloc to unify further

Wants currency union’s members to push toward setting up a “central fiscal capacity” that would establish a “rainy-day fund” that members finance through annual contributions

Christine Lagarde, managing director of the IMF, urged further reform among euro zone members during speech in Berlin. Hannibal Hanschke/Reuters
Christine Lagarde, managing director of the IMF, urged further reform among euro zone members during speech in Berlin. Hannibal Hanschke/Reuters

IMF managing director Christine Lagarde urged Europe to pursue further integration, including on spending, saying a closer union of euro-zone countries would help counter rising populism and protectionism globally.

“A more unified euro area can be a compass to prosperity for the region and a beacon of hope to the world,” Ms Lagarde said in a speech Monday in Berlin.

The IMF chief said the euro zone has made progress on a capital-markets and banking union, two areas in which the fund is calling for greater integration. But she also encouraged the currency union’s members to push toward setting up a “central fiscal capacity” that would establish a “rainy-day fund” that members finance through annual contributions.

With the UK leaving the European Union, Ms Lagarde’s proposal comes as Germany, France and other members debate how to strengthen the 19-country euro zone. While the notion of a central fiscal authority is “politically difficult”, monetary policy did too much of the “heavy lifting” during the last financial crisis and budget austerity worsened the problem, Ms Lagarde said.

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The world also is digesting a series of hawkish US moves on trade. US President Donald Trump’s plan to impose tariffs on Chinese products shook markets last week, as investors worried the move would spark a wider trade conflict with China. Beijing responded swiftly with tariffs on $3 billion in US imports.

Ms Lagarde has been urging countries to avoid being sucked into a global trade war that could undermine the broadest world recovery in years.

“Policymakers need to work constructively together to reduce trade barriers and resolve trade disagreements,” Ms Lagarde said this month, after Mr Trump announced tariffs on steel and aluminium. “Economic history clearly shows that trade wars not only hurt global growth, but they are also unwinnable.”

Mr Trump has welcomed the turmoil, declaring on Twitter that “trade wars are good, and easy to win”.

Ms Lagarde has had some pointed words this year for Germany over the nation’s trade surplus. In January, the IMF chief encouraged Chancellor Angela Merkel’s government to step up public spending to lift growth, saying that Germany’s current-account surplus is too large. The US trade deficit with various nations has been a source of consternation for Mr Trump since his election in 2016.

The IMF will update its global forecast at its annual spring meeting in Washington. In January, the fund raised its outlook for world expansion to 3.9 per cent this year, the fastest rate since 2011, when the world was bouncing back from the financial crisis.

However, the IMF has been warning policymakers to guard against the next recession, even as it hails the broadest global recovery in years.