Leaders Press Europe on Debt

The Wall Street Journal

By JAMILA TRINDLE and IAN TALLEY

WASHINGTON—The world economy is in the "second slowdown of this recovery," and more needs to be done about the European debt crisis before it becomes more severe, U.S. Treasury Secretary Timothy Geithner said Saturday.

Mr. Geithner, in a statement to the policy-steering committee of the International Monetary Fund, called on leaders in Europe to conclusively address the region's problems before the crisis gets more severe in order to "create a firewall against further contagion."

Mr. Geithner's comments come as world economic leaders meet in Washington to address the European debt crisis and other global economic challenges in the annual IMF and World Bank meetings. Broad market declines over the past week have increased pressure on finance ministers and central bankers at the gatherings.

"The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally," Mr. Geithner said.

The head of China's central bank on Saturday also called for a prompt resolution to the euro-area sovereign debt crisis, noting the weakening global economic recovery and an increasingly gloomy outlook. People's Bank of China Gov. Zhou Xiaochuan said risk indicators have "generally worsened" and called for "forceful and credible fiscal consolidation measures" to alleviate the euro-zone crisis.

The IMF said Saturday it is considering boosting the fund's resource base and creating new lending tools. "Our lending capacity of almost $400 billion looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders," IMF Managing Director Christine Lagarde said.

The International Monetary and Financial Committee—the IMF's steering committee made up of finance officials from some of the world's largest economies and representing the fund's 187 members—agreed to "act decisively to tackle the dangers confronting the global economy."

Mr. Geithner also said that the U.S. economy needs more support, in the form of a package of measures put forward by President Barack Obama to stimulate growth and create jobs.

"Without additional near-term support, fiscal policy in the U.S. will be overly contractionary and the U.S. economy will likely grow below its potential in 2012," Mr. Geithner said.

Because demand remains weak in advanced economies, emerging market countries have to increase domestic consumption to support global growth, he said. "China and other emerging-market surplus economies have considerable room to boost consumption and strengthen domestic demand, by allowing their exchange rates to adjust to market forces while diminishing inflationary pressures," Mr. Geithner said.

In a separate statement Saturday, Mr. Geithner said he supported the World Bank's decision to triple aid to countries in the Horn of Africa to address the humanitarian crisis caused by drought and famine.

Mr. Geithner said he supported the decision to "jump-start crop and livestock production, and improve the region's resilience through investments in drought-resistant agriculture and climate-resilient technologies."

Mr. Geithner also welcomed Libya's Transitional National Council, the new governing body that took control after overthrowing Col. Moammar Gadhafi's regime. "The success of these emerging democracies will hinge on building strong and inclusive economies that improve people's lives, especially the lives of young people," Mr. Geithner said.

—Jean Yung contributed to this article.

Write to Ian Talley at ian.talley@dowjones.com