EUROZONE THREAT: Europe at risk of financial chaos from 'populism and protectionism'

In a speech in Berlin, Ms Lagarde alluded to the need for the eurozone to protest against the so-called “populism” as seen in Brexit and this month’s Italian elections, and the protectionism of President Trump’s trade tariffs.

She said: “There are other, forceful headwinds threatening.

“Think of the rise of populism and the short-sighted siren call of protectionism.”

Ms Lagarde said the “sustained and broadly shared upswing” in the global economy offered a precious window of opportunity for governments to “complete the architecture” of the eurozone.

The initial decision to get to work on building an emergency fund could start quickly.

She said: “Within the next six months or so there could be a meeting of minds on the general principles and timeline.”

Even if details took five years to hammer out, the announcement would “let it be public that members of the currency union stick together”.

For the eurozone to prepare for the next downturn, she urged members to develop a modernised capital markets union, an improved banking union and to move towards greater fiscal integration – starting with a central fiscal capacity that would reassure investors.

Eurozone countries would contribute to the rainy day fund each year, building up assets in good times that they could then tap during a downturn.

She said that in extreme circumstances, countries could borrow from the fund and repay loans with future contributions.

Mrs Lagarde recommended that countries pay a premium in good times based on the benefits they receive in bad times, incentivising members to streamline their economies and maintain fiscal discipline.

The “rainy day fund”, known as “fiscal capacity” in Brussels’ corridors of power, was an idea for the eurozone launched in the wake of the sovereign debt crisis.

Mrs Lagarde’s comments support France’s calls to pool eurozone debt.

In October last year President Emmanuel Macron appealed to German Chancellor Angela Merkel to back increasing fiscal capacity in the eurozone.

However, the path towards a common eurozone budget remains controversial in Germany.

Voters fear a so-called ‘budget’ will lead to a pooling of all eurozone national debt with Berlin picking up the tab for poorer and most irresponsible member states.

However, Germany also remains concerned that a fundamental weaknesses in the Economic and Monetary Union (EMU) only served to worsen the sovereign debt crisis, and the eurozone remains exposed to the risk.

Although Germnay is wary of carrying the burden of eurozone debt, there is a sense that, with the sun now shining, the time is right to fix the roof.

The idea has its origins in a paper on the events surrounding the eurozone crisis, published in September 2016 pointing towards the creation of a specific ‘fiscal capacity’ for the countries that have adopted the single currency.

In the longer term, a so-called ‘fiscal capacity’ could lead to the establishment of a dedicated euro-area budget. This idea is believed to be unpopular with German voters who fear that they would be forced to pay taxes into a budget used to bail out failing eurozone economies.

However their stance could be softening with Chancellor Angela Merkel’s conservatives and the centre-left Social Democrats offering some encouragement to that process in the coalition deal they sealed last month. The parties agreed to support devoting specific budget funds to economic stabilisation, social convergence and structural reform in the eurozone.

Those funds – developed from the euro zone’s existing ESM bailout fund – should form the basis for a future bloc-wide “investment budget”, the parties said.