Major economic powers and the International Monetary Fund on Saturday boosted pressure on leaders of the euro zone to resolve their lingering financial crisis, leveling criticism that included a sharp new economic warning from the United States and cultural barbs from the Chinese about the European work ethic.
In an address to the IMF’s chief oversight committee, Treasury Secretary Timothy F. Geithner starkly outlined the worst-case scenario if the 17 euro nations don’t succeed soon: “Cascading default, bank runs and catastrophic risk.”
The threat “must be taken off the table,” Geithner said. “Otherwise it will undermine all other efforts, both within Europe and globally” to keep a tepid recovery from slipping into recession.
Geithner’s warning capped a series of IMF meetings at which the euro zone’s troubles were center stage. The treasury secretary has been pushing for Europe to take dramatic steps to prove that the region’s governments and its central bank will stand behind weaker nations like Greece and prop up the financial system as needed.
The IMF is pushing as well. On Saturday, its International Monetary and Financial Committee said that the euro-zone members had pledged to “do whatever is necessary” to stabilize financial markets that have driven up borrowing costs for relatively large countries like Italy and driven down the value of European banks. The IMFC includes finance officials who represent the fund’s 187 members.
The next few weeks will mark a critical test of the pledge by euro-zone leaders to “act decisively.”
Though the sense of urgency is shared, there is no clear agreement about policy. The European Central Bank is particularly concerned about taking on responsibility for government debt.
Former German ECB board member Jürgen Stark, who resigned in a dispute over the ECB’s role in the crisis, fired back at Geithner that it wasn’t fair to blame the euro zone for a crisis with roots in the United States.
“All the governments have to do their own work before they give advice to others,” he said.
On July 21, the euro-zone leaders agreed to a series of steps that would provide more financing for regional governments and banks, but the ideas must be approved by the currency region’s 17 national parliaments.
A few, including France, have already acted. But votes in Germany and other economically strong northern European countries that will pay more of the bill have not taken place.
Germany is set to vote this week, with others following until a final expected vote in Slovakia on Oct. 14.
European finance officials said that if the recent IMF meetings accomplish nothing else, they will allow German Chancellor Angela Merkel and other northern European leaders to cite the world’s mounting concern and growing impatience as a reason for their parliaments to act.
“There is a very clear recognition of the gravity of the situation,” said Tharman Shanmugaratnam, IMFC chairman and Singaporean deputy prime minister. “There is a very strong resolve that they will do what it takes to avoid the prospect of a prolonged period of stagnation.”
Along with the upcoming parliamentary votes, the euro zone needs to make decisions about expanded funding for Greece — a country that continues to flirt with default on its international loans — and possible changes in the operations of the ECB.
European officials say their focus is on putting the July 21 agreement into action, and have pledged to stand by Greece and prevent it from defaulting.
The uncertainty around Europe is causing global tremors. Growth is slowing. World Bank and IMF officials say concern about a broader crisis, with Europe at its center, is starting to be felt in diminished trade, bank funding problems in developing nations and a reversal of the strong flow of capital toward emerging market countries like Brazil.
A series of moves last week by governments, including Brazil’s, to slow sudden drops in their currency raised the possibility that nations may start taking more unilateral steps to try to insulate themselves from developing problems — a potential recipe for a damaging trade war.
Chinese officials, their nation’s growth linked to exports to Europe and the United States, joined the criticism, arguing that the ongoing sense of crisis showed the shortcomings of western-style democracy and culture.
“The issue is whether Europe can make a decision,” given the 17 parliaments that must approve an expansion to the euro’s bailout fund, Gao Xiqing, president of the state-owned China Investment Corp., said at an IMF panel discussion on Europe.
“You come down to the ultimate question: Can you pull it off?” Gao said. “Culturally, you need to change your way of living and change your way of spending.”