IMF's Lagarde: combining ESM, EFSF would boost confidence

IMF Managing Director Christine Lagarde said on Wednesday that combining the European Union's temporary EFSF rescue fund with its permanent ESM mechanism would help restore confidence in the flagging region and provide a solid firewall to the Greek crisis.

If the two of them could make a common European pot, that would send a very strong sign of confidence in Europe, Lagarde told Europe 1 radio.

German Chancellor Angela Merkel has resisted calls to let the two funds to operate simultaneously, rather than allowing the ESM to replace the EFSF as originally planned. France is in favor of the measure.

The former French finance minister said Europe needed a strong firewall to prevent the crisis in debt-ridden Greece, where she said the situation was extremely difficult, spreading to the larger economies of Italy and Spain.

She said the next few weeks would be crucial to the world economy this year, after the IMF on Tuesday cut its world economic growth forecast to 3.3 percent in 2012.

If the right decisions are taken in the coming weeks, not only at the heart of the euro zone -- which is essential -- but also in the United States, Japan, in the major emerging economies, then the end of 2012 will be better than the beginning, she said. But only if the right decisions are taken.

She said measures were needed to boost growth and competitiveness in many industrialized economies, while some countries needed to reduce fiscal deficits.

(Reporting By Daniel Flynn; editing by John Irish)