Euro zone must act to avoid imbalances -IMF chief

Reuters (Link) - Crispian Balmer (March 29, 2010)

Countries within the euro zone need to improve their economic coordination to avoid large imbalances building in the system, the managing director of the International Monetary Fund said on Monday.

Dominique Strauss-Kahn said the recent financial crisis had laid bare failings within the Europe Union, but said it could prove a positive turning point for the 27-nation bloc if leaders acted on the problems and found joint solutions.

�One of the lessons of the crisis in Europe is that a single currency without enough economic policy coordination may lead to huge imbalances,� he said in a speech to Warsaw�s business school during a one-day visit to Poland.

�In the wake of the crisis, European integration must be sped up, not slowed down ... now is the time to take the European project to the next, higher level,� he said.

He said weak coordination meant Europe had not been able to stave off the Greek debt crisis and added that other problems could arise unless economic governance was instigated.

Euro zone leaders last week agreed that the IMF should have a role in any eventual rescue package for Greece, but Strauss-Kahn did not refer to this in his speech.

The leaders also called for an �economic government of Europe� to coordinate economic and fiscal policies in the euro zone, but there did not appear to be any broad consensus on what this could lead to or what was needed.

Strauss-Kahn�s warning about imbalances building within the euro zone came just two weeks after Paris urged Berlin to boost domestic demand, saying Germany�s huge trade surplus threatened the competitiveness of other euro zone countries.

Germany rejected this, saying that Europe as a whole needed to raise its competitiveness to correct the imbalances.             

Strauss-Kahn, a former French finance minister and long-time supporter of closer EU integration, said the first priority for Europe was to overhaul its financial architecture.

�I see a clear need for an integrated European framework for crisis prevention, management and resolution,� he said.

Another priority was for EU countries to work together to sustain the economic recovery.

�To restore confidence in Europe�s fiscal sustainability, policymakers must formulate, communicate and begin to implement strategies for exiting from crisis-related intervention policies as soon as possible,� he told the business students.

�Having said this, policy actions that would undermine aggregate demand should be postponed until 2011. But those that do not should be implemented now.�