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The fund's chief says Europe needs a contingency plan to protect its economy should the finance crisis worsen
It is time for Europe to develop a contingency plan to protect its economy should the growing finance crisis worsen, Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), warned in an interview with Reuters on Tuesday. Not only that, but the US Congress needs to pull together to pass a significant bailout plan, he said.
"Developing a contingency plan does not mean it's announcing a lot of trouble coming," he told Reuters. "But (Europeans) are not totally immune, and so they need to organize. At the European level this is totally needed."
Strauss-Kahn, who took over the reins of the IMF last November, pointed out that, because there is no regulator that can act across Europe, reacting to a finance crisis should it worsen here is more difficult. "We're right at the moment where action is needed" to develop a coordinated response, he said.
The IMF warning comes at a time when a number of countries in Europe are taking action to prevent the collapse of banks hit hard by the rapidly decreasing availability of short-term credit and the rising interest rates on interbank loans. Countries from Iceland to Germany to the Benelux countries have taken over billions of euros worth of bad loans from wobbling banks. Britain and France have also been hit.
Ireland on Tuesday took the unprecedented step of guaranteeing all bank deposits in the country after rumors began circulating that wealthy depositors had begun removing their money from Irish banks. The move, potentially worth €400 billion ($566 billion) in a worst-case scenario, immediately shored up confidence in Irish banking and led to a recovery of bank stocks after they had plunged on Monday.
So far, though, Europe's response has been on a nation-by-nation basis and the European Union has yet to develop an all-encompassing strategy. French President Nicolas Sarkozy, the current holder of the rotating EU presidency, has said he would like to discuss an EU-wide approach at a summit scheduled for the middle of October.
Many in Europe had long hoped that the US credit crisis would remain a primarily American problem. But as the crisis accelerated in September, EU countries have proven susceptible as well, with credit drying up across the industrialized world. Europe on Monday and Tuesday blasted the United States for its failure to pass the $700 billion bailout plan put together by the administration of President George W. Bush. US Congressional leaders spent Tuesday tinkering with the plan in an effort to make it more palatable to those who rejected the original bill. A new Senate vote is scheduled for Wednesday.
In his interview with Reuters, Strauss-Kahn voiced disappointment that the bailout plan was not passed on Monday. "A non-perfect plan is better than no plan at all," he said.
Strauss-Kahn has also recently reiterated his willingness to transform the IMF into a kind of international regulatory agency in an effort to create and enforce global finance standards. "We can have national or regional authorities, such as the European Union for example, but we need a global guarantor, an institution which monitors standards," he said last Friday.