Europe weighed in at the central bankers conference in Jackson Hole, Wyo., on Saturday, with the president of the European Central Bank and president of the International Monetary Fund calling on governments to do more to address the deteriorating world economy.
“The downside risks to the global economy are increasing,” Christine Lagarde, president of the I.M.F. and former French minister of finance, said during a joint appearance with Jean-Claude Trichet, president of the European Central Bank.
In the blunter of the two presentations, Ms. Lagarde said that economic risks “have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed.”
Mr. Trichet avoided any mention of the European debt crisis that threatens the stability of the global financial system and may define his eight-year tenure, which ends on Oct. 31. Nor did he mention the extraordinary measures that the central bank has undertaken recently, buying Italian and Spanish bonds on the open market to contain runaway borrowing costs.
Instead, Mr. Trichet suggested that Europe’s problems are fundamentally a question of which governments have taken steps to become competitive and which have not.
“Greece, Portugal and Ireland, in particular, had progressively lost competitiveness vis-à-vis their main trading partners in the euro area,” Mr. Trichet said. “Germany is now an example of how big the dividends of reform can be if structural adjustment is made a strategic priority and implemented with sufficient patience.”
Mr. Trichet and Ms. Lagarde were speaking at the annual central bankers conference in Jackson Hole, Wyo. Their calls for governments to take more responsibility for fixing the economic crisis were in line with comments Friday by Ben S. Bernanke, chairman of the Federal Reserve, who on Friday blamed politicians for disrupting the financial system.
Ms. Lagarde, who perhaps has more freedom to speak her mind than a central banker, chastised political leaders for not doing more since the financial crisis began in 2008. Countries need to find a balance between cutting debt and promoting growth, she said.
“Developments this summer have indicated that we are in a dangerous new phase,” she continued. “The stakes are clear: we risk seeing the fragile recovery derailed.”
She said central banks should continue to pursue a loose monetary policy. “The risk of recession outweighs the risk of inflation,” she said.
She also said that banks, whose fragility is a key element of the crisis in Europe, should be recapitalized, forcibly and with public funds if need be. “They must be strong enough to withstand the risks of sovereigns and weak growth,” she said. “This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.”
She also complained about European political fractiousness. “The current economic turmoil has exposed some serious flaws in the architecture of the euro zone, flaws that threaten the sustainability of the entire project,” she said.
Mr. Trichet, in a scholarly discourse on the elements of economic growth, defended the beleaguered euro project, rejecting criticism that its 17 nations are too diverse to perform well together. He argued that Europe has grown almost as fast and created more jobs in the last decade than the United States.
“Adjusted for population growth, there has been virtually no difference between U.S. and euro area growth over the first decade since the introduction of the single currency,” Mr. Trichet said. “The euro area, though, has created more jobs: 14 million compared with 8 million in the U.S.” He acknowledged, however, that Europe lags in deregulating its labor market.
Though too polite to criticize his hosts directly, Mr. Trichet said that income inequality is ultimately a threat to society. While the gap between rich and poor has also widened in countries like Germany, tax policies and more generous social programs mean that European countries still tend to be more economically egalitarian than the United States.
“Extremes of income inequality and restricted opportunity challenge our values and strain the fabric of our societies,” Mr. Trichet said. “Growth skewed towards the few (or absent for a large minority) risks social tensions, undermines institutions and encourages policy failures of one kind or another.”
Mr. Trichet was making his last appearance at Jackson Hole as European Central Bank president. He will hand the post in October to Mario Draghi, governor of the Bank of Italy.
Article source: http://feeds.nytimes.com/click.phdo?i=c7dd67f12d2971e60115147ec61f2ef0
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