Europe's stronger economies should do more to boost growth and beef up the defenses against the continent's debt crisis, the head of the International Monetary Fund said Monday.
After meeting with German Chancellor Angela Merkel, Christine Lagarde urged the leaders of the 17 countries that use the euro to deal with a crisis that's threatening the public finances of a number of countries and raising fears of another recession in the eurozone.
"There are three imperatives _ stronger growth, larger firewalls, and deeper integration," she said in a prepared text of her speech to the German Council on Foreign Relations. "Resorting to across-the-board, across-the continent, budgetary cuts will only add to recessionary pressures."
Lagarde, a former French finance minister, suggested that some of the stronger economies in the eurozone could deal with their own debts in a less aggressive way so they can shore up economic growth.
"Several countries have no choice but to tighten public finances, sharply and quickly," she acknowledged. "But this is not true everywhere. There is a large core where fiscal adjustment can be more gradual."
Germany, which has had to foot a large chunk of Europe's bailouts, has put austerity at the heart of the eurozone rescue effort and is reluctant to put more money into rescue funds.
Merkel and French President Nicolas Sarkozy have both stressed this month that boosting growth in the 17-nation eurozone is a priority _ though Germany, the region's biggest and strongest economy, still insists on strict budget discipline.
Like Merkel, Lagarde underlined the importance of countries pushing through structural reforms to boost their competitiveness and growth potential.
But she was outspoken on the need for a larger eurozone firewall, pointing to the risk that Italy or Spain "could potentially be forced into a solvency crisis by abnormal financing costs." Those two countries are far bigger than Portugal, Ireland and Greece, which already have received bailouts, and are considered too big for the eurozone's already-planned firewalls to handle.
Lagarde advocated increasing the size of the eurozone's permanent rescue fund, the euro500 billion ($650 billion) European Stability Mechanism, which is supposed to start work in July.
She called for "adding substantial real resources," in part by folding into the ESM what remains of the current, temporary euro440 billion ($570 billion) European Financial Stability Facility. That isn't currently planned.
Lagarde also said action by the European Central Bank "to provide the necessary liquidity support to stabilize bank funding and sovereign debt markets would also be essential."
The ECB has provided huge long-term loans to the eurozone's banks, but has been extremely reluctant to step up its limited program to buy government bonds, a program already viewed with suspicion by many in Germany.
Merkel's spokesman, Steffen Seibert, told reporters that Germany does not currently see the need to increase ESM funding, but did say that the chancellor was "prepared to talk about whatever our European partners bring to the negotiating table in Brussels."
On Sunday, Finance Minister Wolfgang Schaeuble brushed aside a question about the possibility of beefing up the ESM.
Schaeuble pointed to decisions made by eurozone leaders at a summit in early December.
"They said that we will reappraise it (the fund) in March, and we are going to take that time," he told ARD television.
Eurozone countries are currently thrashing out details of a budget-discipline pact, or "fiscal compact," championed by Berlin. Lagarde identified a need for it to go further.
"To complement its 'fiscal compact,' the area needs some form of fiscal risk-sharing," she said, pointing to "a number of financing options" such as jointly issued eurobonds or a debt redemption fund.
"Political agreement on a joint bond to underpin risk sharing would help convince markets of the future viability of European economic and monetary union," Lagarde added.
Merkel has fiercely resisted eurobonds, which are deeply unpopular in her center-right coalition, because they could drive up Germany's borrowing costs.
Lagarde said that she understands both the pain felt by those in European countries that have to make deep cuts and the feelings of those in countries that have been thrifty and are now being asked to help.
"But what we must all understand is that this is a defining moment," she said.
"It is not about saving any one country or region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand."