World Bank job should go to Okonjo-Iweala, say ex-staff

Mrs Okonjo-Iweala, currently Nigeria’s finance minister, is also a former World Bank managing director

A group of former World Bank officials has written a letter backing Nigeria’s Finance Minister, Ngozi Okonjo-Iweala, to be its next president.

Traditionally the post is given to the candidate put forward by the US, which this time is Dr Jim Yong Kim.

But in an open letter, 35 former economists and managers said the Bank should choose the next chief on merit.

Another group of economists this week signed a petition backing Colombia’s Jose Antonio Ocampo.

This is the first time the World Bank has had to choose between candidates since its creation more than 60 years ago.

The executive board of the Bank has to choose between Mrs Okonjo-Iweala, a former World Bank managing director, Jose Antonio Ocampo, a former finance minister of Colombia, and Jim Yong Kim, a public health expert and president of Dartmouth College in the US.

The Bank is holding interviews next week and plans to select the successor to outgoing president Robert Zoellick by 20 April, when it starts its spring meetings with the IMF.

Tradition

The three-way fight is attracting increasingly passionate comment from candidates’ supporters. It has also shone a light on the way the World Bank chooses its head.

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[Mrs Okonjo-Iweala] would be the outstanding World Bank president the times call for”

Open letter from economists

The US, which is the Bank’s largest shareholder, has always picked the Bank’s president. It, Europe and Japan have 54% of the votes.

Under an informal arrangement, in return, Europe appoints a European as head of the International Monetary Fund (IMF), which is the Bank’s sister institution. It is currently run by Frenchwoman Christine Lagarde.

Emerging economies have become increasingly unhappy with this system and are pushing for change.

The leaders of Russia, Brazil, China, India and South Africa recently called for a review of that weighted voting system.

The nations, sometimes referred to as the Brics countries, are working to chose a joint candidate, according to the Brazilian finance minister Guido Mantega.

Speaking after a meeting with the US-nominated Jim Yong Kim, he said Brazil has not yet made up its mind who to promote.

“By late next week Brazil should have a position on the matter and I will talk with the other Brics.”

He said Dr Kim had vast experience with the developing world, but he would wait until he had met the other candidates before making up his mind.

Transparency

The letter in support of Mrs Okonjo-Iweala, which is signed by high-ranking managers and economists, including Tunisia’s central bank chief, Mustapha Nabli, criticised some aspects of the selection process.

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[Jose Antonio Ocampo's] intellectual leadership and commitment to development led to significant improvements in these [UN] institutions ”

Petition in support of Mr Ocampo

It said that it still involves nomination by governments, based in part on nationality, and without an agreed list of qualifying criteria.

It called for the process to be made in “an open, transparent, merit-based, and competitive manner rather than simply appointed in line with understandings that no longer reflect the world as it is today”.

Mrs Okonjo-Iweala herself has called for a televised debate between the three candidates.

Her supporters said: “We believe that Mrs Okonjo-Iweala has outstanding qualifications across the full range of relevant criteria.”

Mrs Okonjo-Iweala “would bring the combination of her experience as finance and foreign minister of a large and complex African country with her wide experience of working at all levels of the Bank’s hierarchy in different parts of the world, from agricultural economist to managing director”.

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The World Bank contenders

Kim Yong Jim: Currently president of Dartmouth College. Backed by the US for the job. Born in Seoul, the 52-year-old is a leading figure in global health.

A doctor and former director of the HIV/Aids department at the World Health Organization..

Medical doctorate and PhD in anthropology.

Ngozi Okonjo-Iweala: The Nigerian finance minister, 57, has been endorsed by three African countries – South Africa, Angola and Nigeria.

Previously a managing director at the World Bank.

PhD in regional economics and development.

Jose Antonio Ocampo: Currently professor of professional practice in the International and Public Affairs department of Columbia University. Nominated by Brazil – but not endorsed by – in the name of the Dominican Republic.

Former Colombian finance minister and has held other posts in government, including agriculture.

He has held a number of positions in the United Nations, including as UN Under-Secretary General for Economic and Social Affairs.

BA in economics and sociology and a PhD in economics from Yale University.

• World Bank president candidates

It says “she would be the outstanding World Bank president the times call for” and pointed out that should would be the institution’s first female leader.

They said they cared too much about the institution not to speak out.

Future shape

The petition is support of Mr Ocampo was signed by economists from countries including China, India and Brazil, as well as two former governors of the Chilean central bank.

It pointed to his background working for UN agencies where “his intellectual leadership and commitment to development led to significant improvements in these institutions contribution to development thinking and to development policy design”.

He has also been setting out his views of the future shape of the World Bank.

Writing in the Financial Times newspaper, he said the Bank’s core mandate must remain that of reducing poverty, addressing growing inequalities that have appeared in recent decades and eliminating gender inequalities.

Mrs Okonjo-Iweala has also been outlining what she thinks should be the Bank’s main goal.

She said that it should be creating jobs, in both developing and developed countries, with a particular focus on youth unemployment because of the knock-on social problems it caused.

Dr Kim, who once did a turn as a rap artist at a social event at Dartmouth College, has the support of Canada, Japan and South Korea, where he was born, as well as the US.

He has not yet given an interview about his views on the role at the World Bank, but has described it in a statement as “one of the most critical institutions fighting poverty and providing assistance to developing countries in the world today”.

 

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Dominique Strauss-Kahn on formal sex ring investigation

Mr Strauss-Kahn’s questioning in Lille on Monday came as a surprise

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Former International Monetary Fund boss Dominique Strauss-Kahn has been placed under formal investigation in France over alleged involvement in a prostitution ring.

The move could lead to formal charges.

He has admitted attending parties where the authorities believe prostitutes were provided by a gang, but denies knowing that they were prostitutes.

Last May, he resigned from the IMF after being accused of attempting to rape a hotel maid in New York.

The charges were later dropped.

The maid, 32, is now bringing a civil case against Mr Strauss-Kahn, which is due to start in New York on Wednesday. He has always denied any wrongdoing.

‘No inkling’

Lawyer Richard Malka said Mr Strauss-Kahn doesn’t deny that he attended the parties

Mr Strauss-Kahn faces preliminary charges of procuring prostitutes and involvement in an “organised gang”, one of his lawyers said.

The 62-year-old former IMF head, who could face up to 20 years in prison if tried and convicted, was released on 100,000 euros ($135,000) bail.

Prosecutors say Mr Strauss-Kahn cannot contact defendants, plaintiffs, witnesses or the media in relation to the case.

The BBC’s Christian Fraser in Paris says the allegations relate to his supposed involvement in a vice ring that hired prostitutes for hotel orgies, mainly in Lille, but also in Paris and Washington.

The case has become known in France as the “Carlton affair”, named after a hotel where several orgies are said to have been held.

The magistrates are examining allegations that business associates of Mr Strauss-Kahn were involved in the prostitution ring, and misusing corporate funds.

Eight people have already been placed under formal investigation, including a senior police officer.

Nafissatou Diallo is bringing a civil case in New York

One of Mr Strauss-Kahn’s lawyers, Richard Malka, said: “He firmly declares that he is not guilty of these acts and never had the least inkling that the women he met could have been prostitutes.”

Consorting with prostitutes is not against the law in France, and Mr Strauss-Kahn has acknowledged that he was at some of the parties with the women.

Last month he was held in police custody for 48 hours at the start of his formal questioning.

Our correspondent says Monday’s hearing came as a surprise, and it is not yet clear why Mr Strauss-Kahn appeared before his scheduled appointment later in the week.

However, Mr Strauss-Kahn is also facing the court case in New York.

He will not appear in person there.

His lawyers, and those of the maid, Nafissatou Diallo, will debate whether Mr Strauss-Kahn’s position in the IMF afforded him diplomatic immunity.

The criminal charges against Mr Strauss-Kahn were earlier dropped, when doubts emerged over the reliability of Ms Diallo’s testimony.

Mr Strauss-Kahn had faced a third case – an accusation by 32-year-old author Tristane Banon of attempted rape.

Although magistrates concluded there was prima facie evidence of sexual assault, the statute of limitations precluded a prosecution and the case was dropped.

Brazil wants more IMF power for extra eurozone funds

Guido Mantega wants eurozone nations to put forward more of their own funds

Brazil has said that developing nations would be happy to provide more money to ease the eurozone’s debt crisis, in return for more power within the International Monetary Fund (IMF).

The comments were made by Brazilian Finance Minister Guido Mantega as he met with his opposite numbers at a G20 meeting in Mexico.

He also called on eurozone countries to contribute more of their own funds.

This position was echoed by UK Chancellor George Osborne.

Mr Mantega said: “Emerging countries will only help under two conditions; first that they strengthen their firewall and second for the IMF [voting rights] reform be implemented.

“I see most countries sharing a similar opinion that the Europeans have to strengthen their firewall.”

Mr Mantega, and other G20 finance ministers, want eurozone nations to put more funds into the European Stability Mechanism, the fund set up to bail out nations struggling with their sovereign debt.

‘Colour of money’

German Finance Minister Wolfgang Schaeuble said eurozone nations would look next month at increasing the size of the ESM.

Mr Osborne, speaking to Sky News, said the UK was waiting for this to happen.

“We are prepared to consider [increasing] IMF resources but only once we see colour of eurozone money and we have not seen this,” he said.

“While at this G20 conference there are a lot of things to discuss, I don’t think you’re going to see any extra resources committed here because eurozone countries have not committed additional resources themselves, and I think that quid pro quo will be clearly established here in Mexico City.”

Greek bailout elements in place, says France’s Baroin

Some eurozone ministers doubts Greece’s austerity pledges

All the elements are in place for agreement on a new bailout loan for Greece, the French finance minister has said, ahead of a meeting of eurozone finance ministers in Brussels.

Athens needs the 130bn euros (£110bn; $170bn) in order to avoid bankruptcy in mid-March, when a huge repayment on its governmental debt must be made.

Haggling was likely to continue “until the very last moment”, warned Greek Finance Minister Evangelis Venizelos.

This is Greece’s second bailout.

French Finance Minister Francois Baroin said Greece could not wait any longer.

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Analysis

Gavin HewittBBC Europe editor, Brussels

Here is the gamble: Ignoring the reality of a country in decline, more austerity is demanded by EU officials and finance ministers. Greece has to fire 150,000 public sector workers by 2015. The minimum wage will be cut by 22%. Pensions of more than 1,300 euros (£1,079; $1,709) a month will be cut by 12%.

It is hard to recall when such spending cuts were demanded of a country in economic freefall. The challenge for the EU is immense. It will define their reputation for years to come. Will they end up rescuing a country or breaking it?

When questioned over the strategy, Greek ministers reply by asking, “what is the alternative?” Greek ministers and European officials vividly describe the catastrophe if Greece defaults. “If there is a default,” said the German centre-right MEP Elmar Brok, “then there would be no pensions, no salaries at all. It would become a failed state.”

No-one pretends that default would be an easy option. There would be a run on the banks and, at the most elemental level, there would be the question of how soon a new drachma could be printed and distributed.

But those who oppose the new bailout package argue that Greece is not being saved from the fate of a failed state, but being pushed into one – and for years to come.

• Read Gavin’s thoughts in full

The rescue plan would also write off 100bn euros of debt, with private lenders accepting a 70% reduction in what Greece owes them.

In return, they would receive cash and new bonds, expected to mature in 30 years’ time.

Elections ahead

Mr Baroin said he would plead for the deal at Monday’s meeting of eurozone finance ministers.

“All the elements are in place… both with the bankers, private sector creditors, and public sector creditors, the states and central banks,” he told Europe 1 radio.

Mr Venizelos said he now expected the “long period of uncertainty” to end.

“The Greek people send to Europe the message that they have made, and will make, the necessary sacrifices for our country to regain its position of equality within the European family,” he said in a finance ministry statement issued in Brussels on Monday.

After five straight years of recession, Greece now has a debt greater than 160% of its Gross Domestic Product (GDP).

Eurozone leaders and the IMF said in October that Greek debt should be reduced to the more sustainable level of 120% of GDP by 2020.

Successive rounds of austerity measures, demanded by the EU, the IMF and the European Central Bank – Greece’s international creditors – have failed to restore growth and have provoked clashes between protesters and police.

The Greek government fell last year after ex-Prime Minister George Papandreou called for a referendum on the eurozone rescue package.

He was replaced by Mr Papademos, an unelected technocrat who is expected to lead Greece until parliamentary elections in April.

Measures passed by parliament last week set out 3.3bn euros’ worth of cuts to salaries and pensions, and health and defence spending.

Several thousand people protested in Athens on Sunday against further cuts agreed to by Mr Papademos’ cabinet on Saturday – but the numbers were far reduced from the tens of thousands who protested last week.

US Treasury Secretary Timothy Geithner said the US was encouraging the International Monetary Fund (IMF) to support the bailout, but it is not clear how much the IMF will contribute.

Some eurozone finance ministers doubt Greece’s commitment to its spending pledges and want strong mechanisms to ensure its debts are paid.

It is not yet clear how the eurozone intends to keep the pressure on Greece to ensure it fulfils its commitments, says the BBC’s Europe editor, Gavin Hewitt.

And, he adds, there are doubts that even with the bailout Greece will be able to reduce its debt to a sustainable level.

Funds from elsewhere may need to be found. A first rescue fund of 110bn euros in 2010 was not enough to avert the crisis.

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Shrink the eurozone to save it

Protesters march against austerity cuts Thursday in front of the Greek Parliament in Athens.

STORY HIGHLIGHTS

• Desmond Lachman: Europe’s leaders keep trying to prop up the euro currency union
• He says it will be impossible to preserve current zone in a time of austerity, no growth
• It would be smarter to create a new, smaller currency union of healthier nations, he says
• Lachman: Nations on the periphery would be able to devalue their own currencies

Editor’s note: Desmond Lachman, a resident fellow at the American Enterprise Institute, is a former deputy director of the International Monetary Fund’s Policy Development and Review Department.

(CNN) – With each passing day, Greece’s economic and political malaise deepens despite one massive International Monetary Fund-European Union bailout package after another to keep that country afloat. And with each passing day, as the Greek economy continues its downward spiral under the weight of externally imposed draconian budget austerity, there is the increased risk that a disorderly Greek euro exit could result in real contagion to the rest of the European periphery and especially to Italy, an otherwise solvent country.

This has to raise a basic question: Would not the European core countries be better served by proactively taking action now to form a smaller and more enduring currency union than the presenteurozone? And would such action not be preferable to continuing with the pretense that the euro can be preserved in its present form, which runs the real risk of a disorderly and costly unraveling of the common currency?

Sadly, the IMF and EU’s heroic, if quixotic, efforts to keep Greece afloat with a second 130 billion-euro bailout package that has now finally been agreed upon, are all too suggestive that European policymakers remain in denial that Greece will soon be forced to exit the euro.

This is all the more lamentable since there is virtually no prospect the IMF’s present prescription of further hair-shirt fiscal austerity within Greece’s euro straightjacket is going to be any more successful in stabilizing the Greek economy than was the application of the same policy prescription over the past two years.

One would have thought by now that the IMF and Europeans would have grasped how politically unsustainable is their Greek policy prescription, particularly considering that the Greek economy is now in a virtual state of collapse.

January’s European Summit also provides the strongest of evidence that European policymakers seem to have learned little from their unfortunate Greek experience. For rather than recognize that the internal and external imbalances of countries such as Greece, Portugal, Ireland and Spain have reached such large proportions that make it almost inevitable these countries will be forced both to default and to exit the euro, European policymakers are striving to preserve the euro very much unchanged in its present form.

They are doing so by proposing that all countries should adopt constitutional balanced budget amendments and sign up to legally binding budget-deficit reduction programs that are to be externally monitored. It is supposed that after several years, once the desired degree of deficit reduction is eventually attained, the present monetary union could move toward a full fiscal union that would provide the firmest of underpinnings to the existing currency union.

The fly in the ointment is that to reduce the large public-sector imbalances in the European periphery would require the early restoration of economic growth in those countries.

However, the severe public-sector belt-tightening across all euro-member countries (within the constraints of euro membership that precludes currency devaluation as a way to boost exports) is a sure recipe for a deep and prolonged European recession. And as Greece’s experience over the past 18 months would attest, a deepening economic recession puts deficit-reduction targets well out of reach, increases a country’s public-debt service burden and heightens political opposition to staying the austerity course.

The futility of excessive budget austerity in a fixed exchange rate system is especially the case when one considers the overall European economy is already showing signs of considerable weakness and when the envisaged degree of budget tightening is extraordinarily large. It is for example being proposed that Italy undertake budget cuts and revenue increases amounting to nearly 2 percentage points of gross domestic product a year in each of the next two years, while for Greece, Ireland, Portugal and Spain the proposed budget adjustment is more on the order of 3 percentage points of GDP a year in 2012 and 2013.

At the best of times, attempting to apply multiyear budget adjustment of such a large scale would run the risk of a prolonged and deep economic recession. However, these are not the best of times in Europe given a weak external economic environment and the likelihood of a European credit crunch over the next year as European banks sell assets and restrict credit in an attempt to strengthen their balance-sheet positions.

As if to underline the futility of severe budget tightening in a fixed exchange rate system, for the year ahead the IMF is forecasting a serious deepening in the European periphery’s recession. The most disturbing aspect of the IMF’s latest economic forecast is that Italy and Spain, Europe’s third- and fourth-largest economies, are both expected to shrink by around 2% in 2012. This is almost certain to cause large budget-deficit overruns in both of these countries and to raise questions anew in the markets about these two countries’ debt sustainability.

Against this background of a slow-motion European train wreck one has to wonder whether Germany, France and the other north European-member countries should not avail themselves of those provisions of the Lisbon Treaty that allow countries to exit the union voluntarily. Doing so in unison would afford them the opportunity to bind themselves in a new currency union with stronger underpinnings than the current currency union, including an early move to a true fiscal union that might involve the joint issuance of euro bonds.

A significant though not insurmountable legal obstacle to the formation of a new smaller currency union among the stronger northern European economies is posed by the existing Lisbon Treaty. While that treaty provides that while countries can exit the present currency union either individually or in unison, doing so would require them to leave the EU as well. For that reason, should the core countries decide to leave the currency union in unison they would also need to approve a parallel treaty rapidly, which would provide for the maintenance among themselves of the same present trade arrangements that they have within the EU. Such a course of pre-emptive action would certainly be preferable to a disorderly breakup of the current monetary union.

Greece crisis talks over EU bailout to resume

Lucas Papademos (right) put on a brave face on Sunday, saying limited progress was achieved

Party leaders in Greece’s governing coalition are to resume crisis talks on new austerity measures.

The measures are in exchange for a 130bn-euro (£108bn; $171bn) EU bailout and a 100bn write-off of private sector debt. Athens needs the money by March to avoid a debt default.

Talks on Sunday between Greek PM Lucas Papademos and the leaders of three parties ended without agreement.

Meanwhile, the German and French leaders are due to hold talks in Paris.

Chancellor Angela Merkel and President Nicolas Sarkozy – who have worked closely on resolving the eurozone debt crisis – will take part in a joint Franco-German cabinet session in the French capital.

Investors reacted cautiously to the latest developments. The euro fell 0.7 cents, just over 0.5% against the dollar to 1.307 in early trading.

‘Unable to bear’

Many Greeks have been hit hard by austerity measures

Mr Papademos had hoped to reach a deal with the leaders by Sunday night – but the talks ended without agreement on the painful reforms demanded by the EU and also the International Monetary Fund (IMF).

“Political leaders should give a response in principle tomorrow [Monday] afternoon,” Socialist Party (Pasok) spokesman Panos Beglitis told Reuters news agency.

The leaders of the other two parties in the coalition said after the end of Sunday’s talks that they were still opposed to further austerity measures.

“I am not going to contribute to a revolution that will humiliate us and that will burn Europe”, said Giorgos Karatzaferis, leader of the far-right Laos party.

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A date is approaching, however, when – if there isn’t a deal – Greece faces bankruptcy. On 20 March Greece has to find 14bn euros (£12bn; $18bn) to service its debts. As things stand it does not have the funds.”

Gavin Hewitt BBC Europe editor

• The Greek Marathon

Antonis Samaras, leader of the conservative New Democracy party, said the country was “being asked for more austerity, which it is unable to bear,” AFP reports.

However, the BBC’s Mark Lowen in Athens reports that Mr Papademos’s office has put out a statement saying some agreement was reached on the reduction of public spending by 1.5% of GDP, and on bank recapitalisation.

But there was no deal on cuts to the minimum wage or to holiday bonuses, he said.

If there is no agreement, then Greece’s international loan will be blocked and the country would be staring default in the face – something that could send shockwaves through the global economy, our correspondent adds.

Athens faces loan repayments to private lenders of 14.4bn euros on 20 March.

Eurozone ministers had hoped to meet on Monday to finalise the bailout – Greece’s second – but that meeting had already been cancelled.

High stakes

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Analysis

Mark Lowen BBC News, Athens

Greeks have lived with austerity for much of the last two years and the country is now in its fifth straight year of recession. Unemployment is nudging 20%, businesses are closing and homelessness is increasing.

Two of the three party leaders in the coalition say they are still resistant to the new austerity measures. They fear that they could be stabbing themselves in the back just weeks before possible early elections in the spring.

The cost of failure would be extremely high. If Greece does not reach agreement on these EU and IMF proposals, it could be staring default in the face within weeks. That could send fresh shockwaves through the global economy.

EU officials have expressed frustration with Greece over delays in backing the terms of the latest rescue package.

Reforms that international lenders want to see include a lower minimum wage, the removal of a “13th and 14th month” extra salary which is paid to workers as an annual bonus, and the liberalisation of workplace regulations.

Opponents say that more cuts will worsen living conditions which have already been affected by two years of austerity measures.

Unless Greece promises to implement reforms, the eurozone ministers say Greece will not be able to go ahead with a plan to restructure its privately-held debt.

Greece has prepared a debt plan with private creditors to halve the value of Greek debt and in return receive new, 30-year bonds with an average interest rate of less than 4%.

The restructuring is to help cut Greek debt to 120% of GDP in 2020 from 160% now.

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Global Economy

• Why Greece won’t go away
• What caused the eurozone crisis?
• How will the euro crisis end?
• Crisis jargon buster

Greece holds crucial talks over EU bailout plan terms

Austerity measures have already hit the living standards of many Greeks

Greek PM Lucas Papademos is set to meet the party leaders of his coalition to try and win support for a proposed 130bn euros ($171bn; £108bn) EU rescue.

Mr Papademos wants their backing for reforms demanded by the IMF and EU as a condition of the bailout.

Eurozone ministers had hoped to meet on Monday to finalise the bailout, Greece’s second, but that meeting has now been cancelled.

The money must be in place by mid-March if Athens is to avoid a debt default.

It is hoped Mr Papademos can reach a deal with party chiefs by Sunday night.

“The moment is very crucial,” said finance minister Evangelos Venizelos on Saturday.

“Everything should be concluded by tomorrow [Sunday] night.”

Athens faces loan repayments to private lenders of 14.4bn euros ($19 billion) on 20 March.

The BBC’s Mark Lowen, in Athens, says Greece cannot afford to lose the bailout package and a lot now rides on these talks.

But, our correspondent says, that with potential elections in April, the parties in Mr Papademos’ coalition are wary about being seen to be associated with the austerity measures being demanded by the EU.

‘Great pressure’

EU officials have expressed frustration with Greece over delays in backing the terms of the latest rescue package, which is being put together by the European Union, the International Monetary Fund and the European Central Bank – the so-called “troika”.

“There is great impatience and great pressure not only from the three institutions that make up the troika but also from eurozone member states,” said Mr Venizelos, after what he described a “very difficult” conference call with his eurozone counterparts.

Reforms that international lenders want to see include a lower minimum wage, the removal of a “13th and 14th month” extra salary which is paid to workers as an annual bonus, and the liberalisation of workplace regulations.

Opponents say that more cuts will worsen living conditions which have already been affected by two years of austerity measures.

Unless Greece promises to implement reforms, the eurozone ministers say Greece will not be able to go ahead with a plan to restructure its privately-held debt.

Greece has prepared a debt plan with private creditors to halve the value of Greek debt and in return receive new, 30 year bonds with an average interest rate of less than 4%.

The restructuring is to help cut Greek debt to 120% of GDP in 2020 from 160% now.

Continue reading the main story

Global Economy

• Why Greece won’t go away
• What caused the eurozone crisis?
• How will the euro crisis end?
• Crisis jargon buster

Call for EU to control Greek budget

There are continuing concerns that Greece’s economic woes could have a major impact on the euro.

STORY HIGHLIGHTS

• Athens could be forced to adopt a law committing state revenues to service debt first
• Attitudes towards Greece within the EU have continued to worsen
• On Friday, talks broke up without a deal on two elements of the EU-IMF plan

(Financial Times) — The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.

In what would amount to an extraordinary extension of European Union control over a member state, the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders.

The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing “all major blocks of expenditure” by the Greek government.

“Budget consolidation has to be put under a strict steering and control system,” the proposal reads. “Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time.”

Athens would also be forced to adopt a law permanently committing state revenues to debt service “first and foremost”.

The German plan, circulated on Friday afternoon to finance ministry officials from eurozone countries who make up the so-called “euro working group”, underscores the depths of mistrust between Greece and its European Union lenders.

Despite the appointment of economist Lucas Papademos as technocratic prime minister in November, attitudes towards Greece within the EU have continued to worsen. European officials privately say that there has been little movement on public sector reforms under Mr Papademos.

A senior Greek finance ministry official said Athens was unaware of the proposal and could not comment. A German finance ministry spokesman declined to comment.

Greek voters have already expressed anger about EU attempts to assist in implementing reforms. Horst Reichenbach, the German national who heads an EU task force to assist Greece, was depicted in German military garb by leftwing Greek newspapers when he arrived last year.

Under the new German plan, Athens would only be allowed to spend on the normal functioning of its government after servicing its debt. If such a law is adopted, the proposal states, financial markets and other creditors would be reassured that defaults would not occur in the future.

“If a future [bail-out] tranche is not disbursed, Greece cannot threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement,” the document said.

Even before Germany circulated its proposal, the EU and International Monetary Fund had presented a 10-page list of “prior actions” Athens must implement before the new bail-out is agreed. According to a copy of the document, also obtained by the FT, Greece must cut an additional 150,000 government jobs within three years.

The document, dated Monday, also calls for major budget cuts in defence, healthcare and “entity closures” to bring down this year’s budget deficit. The document said the preliminary estimate for the 2012 deficit target is about 1 per cent of economic output — implying swinging cuts, since previous estimates by lenders put this year’s budget deficit at 7 per cent.

Negotiations between Athens and EU-IMF officials this week have been stormy. On Friday, talks broke up without a deal on two elements of the EU-IMF plan: a request that Greece’s €750 monthly minimum wage be reduced, as well as elimination of the two-month salary bonus granted to private sector workers as an annual bonus.

George Koutroumanis, the labour minister, instead backed a joint counterproposal by employers and trade unions for a three-year wage freeze, arguing wage cuts would plunge Greece into a deeper recession.

Davos 2012: IMF issues austerity warning

Christine Lagarde said austerity was only one of the measures needed to overcome the debt crisis

Inappropriate spending cuts could “strangle” growth prospects, the head of the IMF has warned.

Austerity programmes must be tailored to each economy, Christine Lagarde said, and not be “across the board”.

The International Monetary Fund has been one of those stressing the need for countries to cut their debts, but some fear this could hit growth.

The correct response to the eurozone debt crisis has been a major debate at World Economic Forum in Davos.

“We are not suggesting there should be fiscal consolidation across the board,” Ms Lagarde stressed.

“Some countries have to go full-speed ahead to do this fiscal consolidation, but other countries have space and room. They should explore what to do… in order to help themselves.

“It has to be tailor-made.”

One of those expressing concerns about the possible implications of fiscal consolidation at the gathering at the Swiss ski resort was US Treasury Secretary Tim Geithner.

He told the annual meeting of political and business leaders on Friday that there was a risk of a recessionary “cycle” from austerity measures.

“There is a risk that every disappointment in growth will be met with an austerity that will feed the decline, and that is a cycle you have to arrest to solve financial crises,” Mr Geithner said.

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George Soros has warned that Europe is likely to face a “lost decade”

‘Progress’

Crisis-hit countries such as Greece and Spain are implementing deep government spending cuts and raising taxes in order to try to bring down their deficits.

“For parts of Europe for a long time, there will be no alternative to very substantial adjustment in budget deficits,” Mr Geithner said.

He is one of a number of leaders who have said this week that the deficit-cutting measures have been an important step in addressing the eurozone debt crisis.

Ms Lagarde echoed those on Saturday: “There is work under way. There is progress, as we see it,”

But some see these policies as potentially very damaging. Financier George Soros told the BBC that the fiscal cuts, which Germany supports, could even lead to a “lost decade” of economic stagnation in Europe.

“This German insistence on austerity could destroy the European Union,” he said. “This is reality, this is the harsh reality that we need to face.

“It is not written in stone, the future is not predetermined. We determine the future, so it would be well within the possibilities of the authorities to change it.”

A document, reportedly leaked to the Financial Times, has suggested that Germany could be asking for Greece to do more, including giving up the financial control of its tax and spending decisions to an administrator appointed by Brussels.

Firewall

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For the first time in a while leaders meeting here don’t seem to be stalked by the fear that the eurozone might blow up”

Stephanie Flanders Economics editor, BBC News, Davos

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Austerity is only one part of the solution, Christine Lagarde said.

She, and others on the panel, stressed the importance of reinforcing what is being referred to as the “firewall”, a much-expanded rescue fund made up of funds pledged by eurozone members.

“It is critical that the eurozone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the eurozone so that the financing needs of that zone can actually be met,” she said.

The IMF managing director also spoke of the hundreds of billions of dollars of extra funds she wants to raise to support any crisis-hit countries, especially if a economic downturn takes hold.

Holding up her designer handbag she said: “I am here with my little bag to collect a bit of money.”

“There will be needs in the eurozone, no doubt about it, but in central and eastern Europe there will be needs as well. And in other countries including in low income countries, including in middle income countries, there will be needs. Short term for some, long term for others.”

The UK has been one of those resistant to pledging extra funds for the IMF to help eurozone countries, but there have been indications in recent days that its stance is softening.

“I think there is a case for increasing IMF resources and I think that will also be a way of demonstrating that the world wants to help… solve the world’s problems,” UK Chancellor George Osborne told the Davos audience.

But, like his US counterpart Tim Geither, he said any additional help would be conditional upon Eurozone countries demonstrating they were doing all they could do help fellow members.

“There aren’t going to be further contributions to the IMF from other G20 countries, including Britain, unless we see the colour of their money, and I think that’s a reasonable request.”

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Insider’s guide: Why business leaders go to Davos

Debt deal

For the first time in a while, leaders meeting in Davos don’t seem to be stalked by the fear that the eurozone might blow up, the BBC’s economics editor Stephanie Flanders reports.

But many of the sessions have been discussing what still needs to be done.

“The fact that we’re still, at the beginning of 2012, talking about Greece – again – is a sign that this problem has not been dealt with,” George Osborne said.

“The danger here is that the tail wags the dog throughout this crisis. In other words, the inability to deal with specific problems with the periphery causes shock waves across the whole European economy and the world economy,” he added.

Talks reconvened on Saturday between the Greek government and representatives of its private creditors, including banks and hedge funds.

It is hoped that a deal to renegotiate the country’s debt can be concluded before a meeting of the European Council on Monday. An agreement is a precondition for receiving further bailout funds from European authorities and the IMF.

“Concluding the deal that will lead to a more sustainable situation in Greece, I think actually is fundamental to stability in the Eurozone,” Mr Osborne said.

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IMF: Global economy ‘in danger zone’ over euro crisis

IMF chief Christine Lagarde has warned of a ’1930s moment’

The world’s economy is “deeply into the danger zone” because of risks from the eurozone, the International Monetary Fund (IMF) has said.

The IMF predicts the global economy will grow by 3.25% in 2012, down from an earlier forecast of 4%.

The growth forecast for the UK economy has been cut to 0.6% from 1.6%.

But the eurozone is set for a “mild recession” in 2012, with GDP expected to shrink by 0.5%, compared with a previous forecast of 1.1% growth.

Growth estimates have been reduced for the main eurozone countries, including Germany, which is widely seen as the powerhouse of the region.

Germany is forecast to grow 0.3% in 2012, down from the 1.3% originally predicted in September.

France is expected to show 0.2% growth in 2012, down from 1.4%.

However, the IMF stands by its 1.8% growth prediction for the US, based on recent strong domestic data on jobs and manufacturing.

Risk of ‘spillovers’

Emerging markets, such as central and eastern Europe and Asia, could also be hit by the eurozone crisis.

The IMF said: “While these markets have been quite resilient to shocks and developments in major economies in the past year, recent indicators have weakened significantly and the general business climate has deteriorated.”

The IMF said Europe’s most pressing challenge was to restore confidence and put an end to the crisis in the euro area.

It added that world economies needed “decisive and consistent policy action” to improve the current financial environment.

“There are three requirements for a more resilient recovery: sustained but gradual adjustment, ample liquidity and easy monetary policy, mainly in advanced economies, and restored confidence in policymakers’ ability to act.”

Separately, EU economic affairs commissioner Olli Rehn said he expected a “moderate recession” across Europe in the first half of this year.

On Monday, IMF chief Christine Lagarde warned the global economy could fall into an economic spiral reminiscent of the 1930s unless action was taken on the eurozone crisis.

In its update to its September report, the IMF warned that the “United States and other advanced economies are susceptible to spillovers from a potential intensification of the eurozone crisis”.

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