March 21, 2023

In Davos, Europe Is Pressed for Debt Crisis Solution

DAVOS, Switzerland — World leaders turned up the pressure on Europe on Saturday to erect a more formidable wall of money against the sovereign debt crisis, warning that the euro zone continues to pose a severe threat to the global economy.

George Osborne, the chancellor of the Exchequer in Britain, said a bigger firewall was “a key to unlocking further confidence,” while Christine Lagarde, managing director of the International Monetary Fund, said the fund should be big enough to eliminate any doubts about European resolve.

“If it is big enough, it will not get used,” she said on Saturday during a panel discussion at the World Economic Forum here.

Echoing comments by United States officials, including Treasury Secretary Timothy F. Geithner on Friday, leaders in Davos said that aid to the euro zone from the rest of the world would be contingent on a larger commitment by Europe. Some critics have said it is perverse that the I.M.F., which is financed partly by developing countries, should be aiding wealthy Europe.

“Europe has to be making more effort; otherwise, I don’t think developing countries will want to pay more for the I.M.F.,” said Motohisa Furukawa, the Japanese official responsible for economic and fiscal policy.

The firewall, known formally as the European Stability Mechanism, would have a lending capacity of 500 billion euros ($656 billion) when it begins operating in July, replacing a temporary fund. European leaders are debating ways to increase the bailout fund’s resources to aid overindebted countries, but they face powerful opposition from voters in countries like Germany and have so far failed to act boldly enough to reassure financial markets.

In the short term, though, leaders have gained some breathing room because of emergency cash that the European Central Bank has provided to banks, a measure that has calmed markets. Euro zone leaders are more focused on dealing with what they see as the more immediate danger of a Greek default, and less on testing their taxpayers’ patience by increasing the size of the firewall.

Top officials and economists from outside Europe warned of complacency, and on Saturday in Davos they presented a much more pessimistic view of the European crisis than has been heard in previous days. While many European leaders and businesspeople have argued that the risk of a catastrophic breakup of the euro zone has declined, leaders of other regions said the crisis still had the potential to sow global misery.

“I’ve never been as scared as now about the world,” said Donald Tsang, chief executive of Hong Kong. He said the effect on the world financial system is unpredictable. “We do not know how deep this hole would be when the whole thing implodes on us,” he said.

Ms. Lagarde said: “No one is immune. It’s not just a euro zone crisis. It’s a crisis that could have collateral effects, spillover effects around the world.”

The undercurrent of their remarks was that European policy still lacks credibility in the eyes of the world.

“This has got to have an effect on influence, on perceptions of power in the world that are going to be significant for years to come,” said Robert B. Zoellick, president of the World Bank Group.

Nouriel Roubini, a professor of economics at New York University known for his pessimistic views, forecast Saturday that Greece would have to leave the euro zone this year, and said that there was at least a 50 percent chance that the euro zone would break up within three to five years.

“The euro zone is a slow-motion train wreck,” Mr. Roubini said during a separate panel discussion.

Speakers on Saturday did not say how big they thought the European firewall should be. But, again echoing American officials, they agreed it should be so enormous that no investor would question its integrity. That has not been true of Europe’s financial commitment so far, which has consistently failed to restore market faith in the euro.

Without mentioning Germany by name, Ms. Lagarde said that European countries that are able to should do more to increase domestic consumer spending and slow down efforts to cut government outlays.

“Some countries have to go full speed ahead and do that fiscal consolidation that is so much needed,” Ms. Lagarde said. “But other countries have space and can do something. They should certainly explore what they can do to boost growth in order to help themselves but also to help the rest of the zone.”

The European Central Bank continued to draw praise for providing emergency cash to banks and avoiding a credit squeeze.

“There is not going to be a Lehman-style moment in Europe,” said Mark J. Carney, governor of the Canadian central bank, referring to the collapse of investment bank Lehman Brothers in 2008, which helped set in motion the financial crisis. But he added, “That is different than having a well, fully functioning banking system.”

The officials also drove home the message that Europe cannot expect more help from the outside world, by way of the I.M.F., unless it does more to help itself.

As the Greek government made slow progress on Saturday to reach a deal with creditors to reduce its overall debt, Mr. Osborne expressed amazement that such a tiny country continued to pose a threat to global stability.

“The danger is that the tail wags the dog throughout this crisis,” he said.

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