By Maximilian Clarke

The global economy has narrowly avoided derailment, although it remains in the danger zone as unemployment and fragile financial systems, the International Monetary Fund’s Managing Director has said.

Speaking at the conclusion of the Group of 20 finance ministers and bank governors in Mexico City, Christine Lagarde praised the actions of the European Central Bank in avoiding a second crash, as well as praising increasingly positive indicators from the US.

“Over the last two days, we discussed the challenges facing the world economy and continued our deliberations over next steps and actions,” spoke Lagarde.

“Derailment of the global recovery, which was a clear and distinct danger a few months ago, has been avoided for now thanks to strong policy measures–in particular those of the European Central Bank–and strengthened governance in the euro area, and reforms and adjustment in countries such as Italy, Spain, and Greece. High frequency indicators also now suggest an uptick in activity, mostly in the U.S.

“But the world economy is still not out of the danger zone, and the G-20 countries must now strengthen resilience to further shocks that could result from still fragile financial systems, high public and private debt, and higher world oil prices. Of equal concern is unemployment, which is still too high in many countries.”

“Against this backdrop, we also discussed building stronger global firewalls, including enhancing the Fund´s resources, to guard against renewed shocks and to restore global confidence. As you know, we have suggested an increase in IMF lending capacity of US$500 billion, which would be combined with an equally credible, high quality and properly sized firewall at the European level. I was encouraged by the G-20’s reaffirmation of the importance of this process. Concrete decisions will await the reassessment by euro area countries of their support facilities, planned for March.

“In the meantime, there was progress at the technical level, especially a broad agreement that an increase in IMF resources could be done through bilateral borrowing and note purchase agreements. We have used this model before, and we know it can work quickly. We also need additional technical work on risk mitigation. Clearly the primary safeguard to Fund resources will be, as always, sound economic programs and strong monitoring, but our Executive Board will also assess other risk mitigation policies in due course. Additionally, I welcome G-20 support for completing the 2010 quota reform agreement, and I urge countries to quickly ratify the measures necessary to implement this important agreement.

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