Chancellor tells Davos the world must 'see the colour of Europe's money' before the UK pays into $1tn IMF fund
Britain will insist on seeing the "colour of Europe's money" before it is willing to put taxpayers' cash into a $1tn (£636bn) International Monetary Fund war chest designed to help safeguard the future of the euro, George Osborne has said.
The chancellor set four conditions for Britain's willingness to provide a £16bn guarantee that would allow the Washington-based fund to tackle financial problems in Europe and elsewhere.
Osborne said there could be no new special IMF funding vehicles, there would have to be full IMF "conditionality" – the tough terms debtor countries have to meet in return for loans – and Britain's partners in the G20 group of developed and developing nations must participate.
"And crucially, IMF resources to support individual countries cannot be a substitute for further credible steps by the eurozone to support their currency," he said. "In other words, the world needs to see the colour of their money before it contributes any more."
The chancellor suggested a deal to provide more resources for the IMF was coming together, with the key remaining obstacle being Europe's willingness to put up more money. "I think we can now see a way forward."
Just before Osborne spoke at the World Economic Forum in Davos, Olli Rehn, Europe's economic and monetary affairs commissioner, had told a session that Europe needed stronger firewalls. "I expect we can come to a positive solution. We need the support of our American and British friends. We need to increase the resources of the IMF," Rehn said.
The US treasury secretary, Tim Geithner, appeared to indicate he would support extra funds, but that this would not be a "substitute" for changes in the eurozone.
In a robust defence of the government's approach to both Europe and the domestic economy, Osborne said it would be dishonest of him not to speak his mind about the eurozone problems. He kept up the pressure for a resolution to the crisis following David Cameron's attack on European policymakers on Thursday.
Osborne acknowledged that eurozone countries had achieved much over the last 18 months, including pooling resources in a central fund, giving up sovereignty in a fiscal deal and tackling budget deficits and structural reforms in many countries.
"These are all difficult and courageous decisions, and they are having an impact. But while we should acknowledge these achievements, it would be a disservice to our own citizens to pretend that they are enough."
Eurozone countries needed to convince financial markets that they could respond to any eventuality, Osborne said.
"The eurozone economy as a whole has sufficient resources to put the credibility of the firewall beyond doubt. All that is required is the political agreement to make those resources available on a credible timescale." But while the onus was on Europe to help itself, the IMF should be ready to support individual countries that ran into trouble.
The managing director of the IMF, Christine Lagarde, wants the fund's resources for tackling the financial crisis to double to $1tn, with $500bn coming from the eurozone and $500bn from the rest of the world. Britain's contribution would be about $25bn.
Addressing concerns over the UK's economy, Osborne said: "A resolution of the eurozone crisis would provide the biggest single boost to the British economy in the short term. But we will not put our economy back on the path to prosperity unless we confront our domestic problems. And the biggest of those is captured by a single word: debt."
Osborne said that over the last decade Britain had experienced the biggest increase in debt of any major economy, with the total of household, corporate, financial and public sector debt in the UK reaching 500% of GDP. "As a country we went on a debt-fuelled binge. We are now experiencing the reality of deleveraging."
History showed that this was a painful process, he said, warning in the wake of this week's news of a 0.2% decline in activity in the final three months of 2011 that recoveries after debt crises tended to be slower than other recoveries. "We cannot change what happened in the past, but we can ensure that we manage the process of deleveraging as best we can. And that means that we must never lose sight of this crucial point – when the underlying problem is debt, deliberately adding to the stock of debt is exactly the wrong thing to do."
Osborne said he had inherited an economy that was forecast to have the largest budget deficit in the G20 and since then his decisions on tax and spending had been vindicated by events.
"Growth has been weaker than originally expected due largely to a commodity price shock and the eurozone crisis. But the arguments for deficit reduction have become stronger, not weaker, over the last year.
"You only have to look around us to see how a loss of fiscal credibility can lead to higher interest rates. In an economy as indebted as the UK, that would make recovery all but impossible. And once credibility has been lost, it is a long, hard road to get it back. We have taken difficult decisions that others have ducked."