Financial markets are not yet convinced by the policy actions taken to stem the eurozone crisis, and if they keep falling that will "force more drastic actions", former Deutsche Bundesbank president Axel Weber warned yesterday.
Prime responsibility for dealing with the crisis must be taken by national governments, rather than creating new institutions or instruments, Weber stressed in the annual Per Jacobsson Lecture in Washington.
In Europe, "the situation will deteriorate further before it improves," Weber said in comments after delivering the lecture. "There is no lack of insight [on how to deal with the crisis] but there is a lack of action," he charged.
His remarks came a day after the IMF's policy board promised "bold and coordinated" actions to restore confidence and financial stability – an initiative which former US Treasury Secretary Larry Summers told Emerging Markets "is unlikely to be regarded by markets as of great significance".
Weber’s prescription on what was needed to resolve the crisis should be was very much in line with that proposed by many fellow German policymakers attending the IMF’s annual meeting in Washington.
The first priority was to "deal with the root causes" of the problem in Europe, which is "excess debt," rather than simply "throwing money" at it, Weber insisted.
Simply allowing countries to raise money in greater amounts and on more favourable terms will not overcome their basic problem, which is lack of fiscal discipline, he implied.
His comments come at a time when pressure is mounting for a substantial increase – such as a doubling – of the €440 billion of resources available to the European Financial Stability Fund (EFSF) to enable it to deal with the spreading eurozone financial crisis.
Weber also rejected the idea that issuance of joint eurobonds within the eurozone will help its more troubled peripheral countries. Issuance of "joint bonds" will work only when European countries have "joint agreement" on fiscal policy, he said.
Weber, whose recent departure from the board of the European Central Bank was seen as a protest against it being drawn closer into the rescue process, defended the role of central banks in the crisis, saying this had been "swift, adequate and well coordinated."
He attacked the idea that the IMF should assume more of the role of central banks in averting and dealing with financial crises. "The IMF is not a world central bank and not a global lender of last resort," he said. "It cannot, and should not be a 'hub' for central bank swap lines."
Nor does the IMF need to be provided with additional resources and instruments for dealing with the liquidity aspects of a crisis, he said. "In those cases where central banks do not provide swap lines in a systemic crisis, the IMF is well placed with its existing instruments to cover liquidity needs while staying within its resources envelope."
The IMF should not attempt to become an "umpire" over global capital flows, Weber argued. Instead, "in close cooperation with the Bank for International Settlements, the IMF should play an enhanced role in the global monitoring of capital flows. It should prioritize closing data gaps on global capital flows."
The main lesson of the current crisis "is that we need a better-regulated financial market environment," Weber suggested. "This would be a true safety net for our societies and for the international financial system."
The international monetary system "has largely remained robust during the crisis", Weber said. "However, large internal and external imbalances exist and have to be addressed. This is a problem with global ramifications, which requires a cooperative approach at the global level."