The International Monetary Fund's annual meetings in the Thai capital closed with a pointed message from Frankfurt on budgets. Christine Lagarde's statement to the International Monetary and Financial Committee, published by the ECB on Saturday, set out the central bank's view of the world economy and the euro area. Fiscal sustainability remains a "crucial anchor" for broader economic stability, Lagarde said in the statement, urging governments to stick to fiscal rules, consolidate where debt is high and rebuild buffers. Energy-related spending, she added, should be temporary, targeted and tailored.
The euro area is contending with an energy shock that is clouding growth while pushing up prices. Risks to the outlook are tilted to the downside and inflation risks point upward, Lagarde reiterated, adding that the shock is "too large to look through" though a measured response remains appropriate. Borrowing costs have already gone up twice, in June and again in September, and another increase is broadly anticipated before the year closes, according to The Business Times, which quoted Governing Council member Joachim Nagel as saying more may be needed and Olli Rehn pledging a steady course.
The IMF's own assessment of the region, released in the same week, struck a similar tone. Europe keeps growing, if slowly, and monetary policy may need to do more while expansionary fiscal policy should be avoided to keep pressure off inflation, the fund said in its regional outlook. It identified weak productivity as the deeper problem and pointed to single market and national reforms as the most effective remedy.
Beyond the euro area, Lagarde turned to the fraying global trading system. Restoring open and predictable international relations anchored in legal rules, she said, would give cross-border trade and investment room to grow. She also noted that many central banks have expressed interest in the Eurosystem's enhanced repo facility, designed to support the smooth transmission of policy and bolster the euro's international role.