The Managing Director of the International Monetary Fund (IMF) Christine Lagarde on Monday called for taking bold steps towards a capital market union, including the setting up of a “rainy day” fund.
While speaking in Berlin, Lagarde said urgent steps were needed towards capital markets integration to prepare for Brexit and the “inevitable” next crisis.
Brexit urgency for financial integration
During her speech, Lagarde presented integration as an antidote to populism and “short-sighted” protectionism. She also noted that Brexit will shift financial activity from London to the Continent, which means that capital markets must urgently prepare for the new economic landscape.
Lagarde also called for modernising the capital markets and an improved the banking union, while also saying improved oversight is needed to manage the influx of financial services.
She hailed plans within the banking union for the creation of a common insurance on deposits, as well as a roadmap for reducing banking sector vulnerabilities.
In an interview with Bloomberg, while in Berlin, Lagarde urged the leadership of France and Germany to lead the political charge towards further Eurozone integration, which would also include the Netherlands and Italy in leading roles.
Now that a government in Berlin has formed, and given the economic boom in the Eurozone, Lagarde expressed her certainty that the conditions are ripe for the EU to promote integration.
“I would say that until the end of the year, a window of opportunity exists when they can give signals, set objectives, and agree on the principles,” Lagarde said.
“A more unified euro area can be a beacon prosperity for the region and hope in the world,” Lagarde added.
Lagarde was critical of Germany in her comments to Bloomberg, suggesting that Berlin had been too gradual in dealing with its current account surplus, making clear that it was time to rebalance the picture.
The current economic upswing conditions are ripe to prepare for the Eurozone’s inevitable next crisis, which Lagarde said would be best dealt with through a “rainy day” fund financed through annual member state contributions to the tune of 0.35% of their GDP. This would provide the EU with the scope needed for countercyclical “fiscal capacity”, and help reassure investors as the fund could be used as a lender of last resort.
Echoing the IMF experience, Lagarde noted that such loans, whenever approved, should be conditional to structural reforms.