IMF boss urges ‘rainy day fund’ for eurozone

International Monetary Fund chief Christine Lagarde said yesterday that eurozone countries should set up a "rainy day fund" that could cushion members when they hit economic hard times, reports AFP from Berlin.

"For a relatively modest cost... a central fiscal capacity could reduce the negative effects on output by more than 50 percent" during a crisis, Lagarde said in a Berlin speech, citing findings by IMF researchers.

Countries could pay around 0.35 percent of their annual gross domestic product into the common pot, which would pay out in times of need -- on condition they upheld strict spending rules.

Lagarde added that "in extreme circumstances, the fund would be allowed to borrow" if it needed more financial heft to back struggling nations.

The former French finance minister's proposals throw the IMF's weight into a mounting discussion about how to buttress the 19-country eurozone.

French President Emmanuel Macron promised voters he would renew the currency area and equip it with a centrally-managed common budget, after years of crisis hobbled growth and sent unemployment soaring.

But while he hopes for support from German Chancellor Angela Merkel's new government, smaller fiscally conservative countries like the Netherlands and Finland fear a joint promise of support would encourage bad behaviour.

Governments could spend more recklessly if they knew they were insured against financial difficulties, critics argue, a problem known to economists as "moral hazard".

Those are "legitimate fears", Lagarde acknowledged.

However, "transfers from the fund should be conditional on a member's compliance with EU fiscal rules," which limit how much debt national capitals can take on and how large a deficit they can run.

The IMF chief added that it was urgent to put tools in place now before a crisis hits.

Many observers have pointed to a window of opportunity for eurozone reforms that could close by the next European Parliament elections in May 2019.

 

IMF boss urges rainy day fund for eurozone

International Monetary Fund chief Christine Lagarde said yesterday that eurozone countries should set up a rainy day fund that could cushion members when they hit economic hard times, reports AFP from Berlin. For a relatively modest cost... a central fiscal capacity could reduce the negative effects on output by more than 50 percent during a crisis, Lagarde said in a Berlin speech, citing findings by IMF researchers. Countries could pay around 0.35 percent of their annual gross domestic product into the common pot, which would pay out in times of need -- on condition they upheld strict spending rules. Lagarde added that in extreme circumstances, the fund would be allowed to borrow if it needed more financial heft to back struggling nations. The former French finance ministers proposals throw the IMFs weight into a mounting discussion about how to buttress the 19-country eurozone. French President Emmanuel Macron promised voters he would renew the currency area and equip it with a centrally-managed common budget, after years of crisis hobbled growth and sent unemployment soaring. But while he hopes for support from German Chancellor Angela Merkels new government, smaller fiscally conservative countries like the Netherlands and Finland fear a joint promise of support would encourage bad behaviour. Governments could spend more recklessly if they knew they were insured against financial difficulties, critics argue, a problem known to economists as moral hazard. Those are legitimate fears, Lagarde acknowledged. However, transfers from the fund should be conditional on a members compliance with EU fiscal rules, which limit how much debt national capitals can take on and how large a deficit they can run. The IMF chief added that it was urgent to put tools in place now before a crisis hits. Many observers have pointed to a window of opportunity for eurozone reforms that could close by the next European Parliament elections in May 2019.