Last week, IMF had a global conference call on its 2011 Article VI Consultations with the Euro area with Luc Everaert, Assistant Director and Division Chief for Euro Area Policies, European Department, Aasim Husain, Senior Adviser, Strategy and Review Department, Charles Enoch, Deputy Director, Monetary and Capital Markets Department, and Olga Stankova, Senior External Relations Officer, External Relations Department. Here are excerpts of the conference call

Luc Everaert: Essentially when we had the Board discussion, there were two main messages. One, we think that the recovery in the Euro Area is well underway but it’s subject to a very important downside risk from the sovereign crisis affecting some of the Euro Area members.

Addressing and containing this crisis remains the first priority for the Euro Area, but it’s also very important to prevent spillovers to the region and the global economy. In short, what’s necessary for the Euro Area is also good and essential for the world.

The second main message from the discussion is that we need much stronger economic governance in the Euro Area. We need that across all fronts. Essentially, we need more Europe at this point and not less Europe. So let me just very briefly elaborate.

•Lagarde

I think on the outlook we’re maintaining our forecast that was released in June of 2 per cent growth for the Euro Area this year and 1.7 next year. Under this forecast, we think fiscal consolidation should continue and monetary accommodation can be gradually withdrawn.

But as long as these sovereign tensions are in place, we do think that unconventional monetary policies need to remain in place. The key question is therefore how do we contain the sovereign crisis? What is necessary?

Directors stressed two things. It’s obvious that all the program countries need strong program implementation, but what’s more important and is the focus of these reports is that we need also a consistent and concerted effort at the Euro Area level. Here, directors see three essential actions.

First, we need to very quickly implement the commitments to scale up the EFSF, but maybe even more importantly, we need to make it more flexible to allow it to intervene in many different ways and also on easier terms. The second point is that the authorities should clarify their approach to private-sector involvement both in program countries and in the ESM.

The third point is that European banks need to be strengthened throughout the Euro Area with a very strong follow-up to the current stress tests that came out and with a preference to private-sector solutions.

Mr. Husain: A little bit of background on the spillover work. The Spillover Report and related Selected Issues Notes are part of a pilot exercise by the IMF to examine the external effects of domestic policies in the five largest systemic economies, so that includes the Euro Area, China, Japan, the United Kingdom and the United States.

The aim of this pilot exercise is to provide a global perspective for policy advice in bilateral Article IV discussions and to provide a new perspective in the Fund’s multilateral surveillance work.

The main message from the Spillover Report on the Euro Area as you’ve just heard from Luc is one that will not surprise, that stresses in the Euro Area could have major global effects especially if the stresses were to intensify.

To support this message, we have broad-ranging analysis covering a number of analytical tools and tries to assess the global effects of the Euro Area’s current and prospective monetary fiscal and even structural policies.

I’m not going to try to summarize all that work now, but just to point the interested reader in that direction. The resulting implication of the analysis is that containing the crisis in the Euro Area and stopping it from spreading to core Europe is critical for limiting spillovers. In other words, what is good for the Euro Area itself is good for the rest of the world.

Ms. Stankova: Thank you, Luc, thank you Aasim. Now we are ready to take your questions if you have any.

Thank you. I’m reading a sentence in your report, “Serious trouble in the periphery spilling over into the core would upset the scenario of continued growth with a very unpredictable outcome.” It seems to me that it’s not characterized. Could you please tell us what would be the possible worst outcome?

Luc Everaert: We have in the context of the current financial crisis seen shocks that were unpredicted and unknown and I think that in the context of the Euro Area, it’s very hard to predict how contagion is going to work.

It’s easy to look at the trade channels and the direct financial channels, but it’s not so easy to look at investor confidence.

So one bad-case scenario that we have in mind is of course that investors no longer have confidence in sovereign debt of a number of countries in the Euro Area and therefore that there is a withdrawal of investment and that could have quite unpredictable consequences.

It’s hard to tell. There are safe-haven effects, but then there are other effects as well, so we cannot really quantify these earthquake-type scenarios.

Thanks for the call. I’m just wondering since you all are talking about a comprehensive solution for solving the Euro sovereign debt crisis, if the current solution in the EFSF is large enough to handle either contagion into Spain or Italy and what the IMF is recommending specifically.

I know it made some recommendations in the last assessment of the Euro Area — what its specific recommendations are for comprehensively solving this sovereign debt crisis.

Everaert: Thank you. That’s two related questions. Maybe taking them in turn. I think the size as you know of the current Crisis Management Facility is being scaled-up to close to 500 billion euro and this is certainly sufficient to address the current needs, even the contagion from other countries, but I think it’s important to note and European authorities are on board with this, that they have said they will do whatever it takes to safeguard Euro Area stability so it may be possible that in the future, we need to revisit this.

What do we mean by a comprehensive approach? I think that it’s an approach that has to solve a couple of uncertainties that are currently weighing on the markets.

There are three essentially so let me just briefly recap. One is that if you want to deal with the crisis, you need flexible instruments. This is the approach that the IMF has as well. So we would really advocate the Crisis Management Facilities to allow interventions in secondary markets, provide guarantees, backstops for other fiscal agents and for banks if necessary.

The second part is that we have this still continuing discussion about the extent of private sector involvement and this is a large uncertainty that has to be resolved. There are different ways to resolve this uncertainty, but the key point is to take that uncertainty off the table and that’s a decision that national authorities in the Euro Area need to make.

The third thing that we think and we also mentioned when the stress tests came out is that in the current environment, most of the banks in the Euro Area should build additional capital buffers because that will provide additional confidence that these kinds of shocks can be handled.