Europe has reacted coolly to the demand (August 27) by International Monetary Fund’s new chief, Christine Lagarde, for Europe to inject more money into its capital-starved banks.
In a speech to central bankers meeting in Jackson Hole, Wyoming, the former French Finance Minister took a step away from her government’s official position and warned that “without urgent recapitalization of European banks we could easily see the further spread of economic weakness.”
It was Lagarde’s first public call for Europe to take policy action since she became head of the IMF in early July. Her comments were echoed in a joint appearance with fellow Frenchman Jean-Claude Trichet, President of the European Central Bank. In October Trichet hands the post over to Mario Draghi, governor of the Bank of Italy.
Lagarde said the world economy is in a “dangerous new phase” and warned of a crisis in liquidity. She called on European banks to first seek private resources to recapitalize but to use public funds if necessary, something that is unlikely to be a popular move.
Reacting from Brussels (August 29), European Commission spokesman Amadeu Altafaj said that there was no need for European banks to recapitalize their banks; that banks in the region are better capitalized than they were one year ago.
In July, euro zone leaders agreed to let a 440 billion euro bailout fund finance the recapitalization of banks if necessary. An earlier IMF call for euro zone leaders to increase the size of the bailout fund has been rejected by Germany and France.
Addressing the Jackson Hole summit before Lagarade, US Federal Reserve Chairman Ben Bernanke noted that “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Although he gave no specifics, Bernanke eased market fears somewhat when he said that the US economy will see better growth in the second half of this calendar year.
There was, in fact, very little discussion of monetary policy at Jackson Hole, normally the subject of central bank summits. But no one complained, perhaps an acknowledgement that the most urgent issues confronting the world today are the euro zone’s sovereign debt crisis and the stalled US economic recovery.