Eurozone crisis, US fiscal cliff threaten world economy – IMF

24 September 2012 19:45  [Source: ICIS news]

WASHINGTON (ICIS)--Uncertainty grips the globe, the recovery is slowing, and the eurozone crisis along with a looming US fiscal cliff pose the greatest risk to the worldwide economy, the International Monetary Fund (IMF) chief said on Monday.

In remarks delivered in Washington, IMF managing director Christine Lagarde said that although central banks and other government policymakers in Europe and the US have taken positive steps to stem the crisis, “the global economy is still fraught with uncertainty, still far from where it needs to be”.

Lagarde said that while IMF economists still anticipate a gradual recovery for the world economy, “global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last twelve months”.

In its July appraisal, the IMF said that Europe’s GDP this year would at best see a minimal 0.7% growth and could see a contraction of 0.3%. That July report also said that the eurozone crisis was at “a new and critical stage”.

“A number of factors are weighing the global economy down,” Lagarde said, adding that “At the centre of them all is the element of uncertainty”, doubt about whether government policymakers can fix the problem.

That uncertainty is strongest in the EU, she said, where “Europe obviously remains the epicentre of the crisis and where the most urgent action is needed”.

She said that moves by the European Central Bank (ECB) earlier this month to support Spain’s creditworthiness have helped, but EU nations must do more.

Lagarde said that EU member nations must move quickly toward “a strong and effective banking union” and establish a European fiscal union, but she conceded that achieving those goals will be a challenge.

“Given the scale of the problems that face the eurozone countries in crisis, these programmes are extremely difficult – we all recognise that,” she said.

However, she added, “We also recognise that there is no alternative to the structural reforms and fiscal adjustments needed to get back on the right path”.

An EU fiscal union and unification of the multiple European banking systems are goals that remain controversial among many EU member nations, especially Germany, Europe’s strongest economy. 

The Germans and others fear that achieving EU fiscal and banking union will require that individual nations surrender much of their sovereignty to a European central government, a sort of United States of Europe.

In addition to the eurozone sovereign debt and banking crisis, Lagarde said that “another major risk is threatening in the United States”, referring to the so-called “fiscal cliff” which could force major reductions in US federal spending and much higher income taxes beginning on 1 January unless Congress acts to modify them.

Lagarde noted that remedial action by Congress is difficult when political constraints are imposed by the coming US national elections.

“But the current uncertainty presents a serious threat for the US and, as the world’s largest economy, for the global economy,” she said.

The IMF chief also warned that growing public debt, “now at levels rarely seen since the Second World War”, risks “becoming even more entrenched, even more difficult to turn around”.

“And now we are also seeing other global ripple effects: the slowdown in emerging markets, great concern in low-income countries about rising food prices and volatile commodity prices [and] growing frustrations across the Middle East,” she said.

The IMF was established in the closing days of World War II to promote international monetary co-operation and stability, foster economic growth and employment and to provide financial assistance to countries to help ease balance of payments problems.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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