–Europe Has Put In Place A Stronger Set Of Tools For Managing Crisis
–Actions By Italy, Spain Governments ‘Quite Promising’
–IMF Has Substantial Resources, Can Raise More Very Quickly If Needed
–Sees China Growing Between 7% To 9% Over Medium Term
–China Not Yet At End Of Reform Process

By Brai Odion-Esene

WASHINGTON (MNI) – The Eurozone has put in place a stronger set of
tools for managing the sovereign debt struggles of some of its members,
but resolving the crisis promises to be a protracted and “politically
very difficult” process, U.S. Treasury Secretary Timothy Geithner said
Wednesday.

In remarks during a moderated discussion at the Brookings
Institution, Geithner also said China’s economy should grow between 7%
to 9% over the medium term as long as Europe continues making some
progress in dealing with the crisis.

He noted that individual euro area governments are in the process
of implementing some “very tough” fiscal reforms.

“What the governments of Italy and Spain are doing are very
difficult … but I think they are quite promising,” he said, because
they are confronting not just fiscal and financial sectors issues, but
also tackling labor market and broader business reform.

As a whole, Europe has done a better job of reassuring the world
that they are going to take the risk of “catastrophic failure” —
cascading defaults by governments, systematic collapse of financial
systems, or the dismembering of the euro area — out of the market,
Geithner said.

But despite these actions, “This is going to be a long, difficult
protracted process — politically very difficult — and it’s going to
just require some reinforcement and sustained effort over time,” he
said.

In the lead up to this weekend IMF Spring meeting, there have been
questions over whether the U.S. will also contribute to boosting the
organization’s resources, but Geithner noted that the U.S. already
provided aid to Europe via its central bank.

The dollar swap lines set by the Federal Reserve came at a critical
moment, when funding concerns for EU banks were high, he said, adding
the Fed has indicated it will leave that framework in place for as long
as it makes sense.

“We are the only ones providing assistance directly to Europe,” he
said. “Those swap lines have had a very important role in dampening and
cushioning the effects of Europe’s crisis on the rest of the world.”

The IMF itself has $400 billion in available resources — “a very
substantial pool of money,” he called it — and it has the ability to
raise additional finance from other countries “very, very quickly” if
needed, Geithner said.

“That will prove to the world that there is a substantial capacity
that can reinforce what Europeans are doing and help cushion, if
necessary, the effects of any European trauma to the rest of the world,”
he said. “We have been very supportive of that process, and will be very
supportive of it this week.”

What the U.S. does not want to see, he continued, are attempts to
use IMF funds as substitute for more forceful actions by European
authorities.

“Europe is a relatively rich continent, it absolutely has the
financial resources to manage this problem,” he said. “It’s got to play
the dominant financial role.”

But Geithner also stressed the importance of achieving the right
balance between growth and austerity.

Given the risk of a prolonged period of weak growth in Eurozone
periphery — and that economic weakness tends to produce larger deficits
in the short term — “you don’t want to have to offset that increase in
the deficits with immediate, difficult cuts in spending,” Geithner said.

He said the best approach instead is to gradually phase-in medium
term plans for reform, cautioning that front-loading cuts in spending
risks undermined the prospects for some stability and recovery in
growth.

“And you may end up undermining and setting back the cause of
reform,” Geithner said.

Commenting on concerns surrounding the slowing pace of China’s
economic expansion, Geithner said there is a general confidence among
experts that the Asian giant will see growth of about 7% to 9% over the
medium term.

“I think that is a realistic forecast as long as Europe is still
making some progress and working through its crisis,” he said.

Asked about China’s announcement last week that it was widening the
renminbi’s daily trading band against the dollar to 1.0% above and below
the central parity, Geithner said the cumulative effect of China’s
action with regard to its exchange rate is “very significant and very
promising.”

“They signal a continued commitment by the Chinese authorities …
to this broad change in growth strategy,” Geithner said, one that is
less dependent on external demand and more reliant on domestic markets.

While this is encouraging, there is still a long way to go —
especially on the currency front, he added.

“China has made the basic judgment that it is essential to the
long-term economic interest of China that they create an exchange rate
that gives it the independence to run economic policy in China to suit
Chinese conditions,” Geithner said. “They are not at the end of this
process of reform.”

** MNI Washington Bureau: 202-371-2121 **

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