WASHINGTON (MNI) – IMF Acting Managing Director John Lipsky said
Monday it is essential the euro zone quickly end the debate on debt
restructuring and setting up a European Stability Mechanism, and said
continued financial support is needed under the right conditions.

The text of the opening statement of his press conference in
Luxembourg where he presented the findings of the annual review
of the euro zone economy, follows:

The meeting with the Eurogroup today concluded the discussion of
the 2011 Article IV mission of the IMF with the euro area. This is a
long-standing tradition that exemplifies the intensive and productive
dialogue between the Eurogroup and the IMF. This dialogue has always
been important, and is certainly so today.

This year’s consultation is somewhat out of the ordinary, not only
because of the IMF’s program involvement with several euro area member
states, but also because it includes two additional reports:

” An assessment of the European Union’s financial stability
framework, called the European Financial Stability Framework Exercise
(EFFE), which is a complement to individual country Financial Sector
Assessment Programs, and;

” A report on the impact of the euro area and its policies on the
global economy. This spillover analysis is part of a larger IMF effort
to map the interactions between the large and systemic global economies.
In addition to the euro area, this includes the United States, Japan,
China, and the United Kingdom. The spillover reports are a new tool in
the IMF’s toolkit to strengthen our analysis of multilateral economic
and policy interactions in the wake of the global financial crisis.
Reflecting the nature of the euro area’s links with the global economy,
the report focused on financial and trade linkages in particular.

The findings of these two reports have been integrated in the
Article IV consultation discussions with euro area authorities. Our
concluding statement has been made available and will be posted on the
IMF’s website. We have two main messages:

” First, the recovery is broadly sound, but the sovereign crisis in
the periphery remains a risk and will require continued action and
attention to avoid it causing trouble in the core and spilling over to
the rest of the world.

” Second, regardless of the crisis in the periphery, the ongoing
efforts to secure a dynamic and resilient monetary union remain relevant
and should be further strengthened.

Some key points:

The crisis has brought the euro area to a crossroads-and the
management of the ongoing sovereign debt problems in several countries
is a key element in this. Clearly, only a cohesive and cooperative
approach to crisis management will be successful. This means that the
determined commitment to reforms and adjustment in the program countries
must continue–including immediate and far-reaching structural reforms,
privatization, and the opening of markets to foreign ownership and
competition. A cooperative approach also requires continued euro area
financial support under the right conditions to allow and foster
success: a scaled up but also a more flexible EFSF will be important;
and it is essential to bring the debate about debt re-structuring and
the set up of the ESM quickly to a close.

Turning to the financial sector, the agenda has been clear for a
while. But it is important now to push further ahead with
implementation. It is imperative that the ongoing bank stress tests lead
to a fundamental strengthening of the capital positions of euro area
banks. Market-based solutions to add capital should dominate. For
example: why not foster cross-border takeovers? Why not focus on the
development of corporate bond markets and re-establish high quality
securitization–to support firms while banks adapt to the new regulatory
environment?

The path to more growth is through more economic integration. The
recovery is broadly sound, even though growth remains uneven and
moderate overall. Low growth aggravates banking problems, makes the
necessary fiscal consolidation more difficult, and does little to reduce
the still high unemployment in much of the region. Policymakers have
focused on national priorities, but the solution for growth is
completing the single market. Labor and equity capital have to flow
freely across borders to wherever they are needed most to unleash
Europe’s growth potential and create new jobs. Opening capital markets,
not only for banks, is particularly important in this respect. [To use a
catchphrase: well-working markets have no need for "national
champions."]

But the single market cannot blossom without stronger common rules
and more intrusive governance. Briefly, the euro area needs

” A more integrated financial stability framework. Strong common
rules for regulation and supervision are crucial. These rules should
have sufficient flexibility to deal with macro-prudential risks,
coordinated by the European Systemic Risk Board (ESRB). There has been a
lot of progress here, but still more needs to be done to strengthen
joint crisis management and resolution with a common backstop financed
by the financial industry to protect taxpayers.

” The euro area also needs to continue to strengthen its economic
governance. To make a difference, rules will have to be more intrusive
and do a better job shaping national policies. This means more automatic
rules, implemented within tighter deadlines, and a greater say for the
Commission in handling the Stability and Growth pact (SGP), the
Excessive Deficit Procedure (EDP) and the new Excessive Imbalances
Procedure.

To conclude, the euro area is a globally important economy. Our
analysis suggests that the spillovers from the ongoing difficulties in
the periphery are relatively small. But it also shows that the crisis
would be felt much more strongly around the world if it spread to the
banks in the core of the euro area. This entails an important message.
It implies that success in managing the current crisis, deepening
integration, and improving governance will benefit not only the euro
area but also the global economy.

Looking ahead, it is important to learn from the crisis and define
a clear vision for the future. The story of European integration since
WWII has been an incredible success-not least because the leaders that
built the European Union and the euro area looked beyond the crises of
their day. Indeed, if the euro area is to be more stable and resilient
and live up to its growth potential, it will have to press ahead with a
broad reform agenda now. Many welcome initiatives are under way, but in
our view in nearly all areas a few crucial additional steps are needed
to make them add up to a consistent set up.

Thank you.

** Market News International Washington Bureau: 202-371-2121 **

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