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IMF warns of eurozone recession, presses Germany

10 october 2014, 15:43
0
IMF chief Christine Lagarde. ©AFP
IMF chief Christine Lagarde. ©AFP

The International Monetary Fund stepped up its warnings over a possible eurozone recession Thursday, pressing governments like Germany to spend more for reverse a stall, AFP reports.

Worries about the eurozone stagnating were at the forefront as the annual IMF-World Bank meetings on the global economy kicked off.

Despite the general recovery from the financial crisis that began six years ago, red flags were out for a number of dangers -- the West African Ebola epidemic, the Ukraine crisis, the conflict in the Middle East, and the potential global whiplash from the coming policy tightening by the US Federal Reserve.

IMF Managing Director Christine Lagarde pointedly warned that the eurozone could fall back into recession if action is not taken to prevent it.

"We are not suggesting that the zone is heading toward recession, but we are saying that there is a serious risk that that happens if nothing is done," she said.

Lagarde said that the IMF puts the chance of the euro area slipping back to a prolonged contraction at 35-40 percent -- "not insignificant," she added.

"If the right policies are decided, if both surplus and deficit countries do what they have to do, it is avoidable."

Lagarde emphasized that world economic growth overall was a firm 3.3 percent this year, and speed up to 3.8 percent in 2015.

But she called that "mediocre", and while much better than just a few years ago, what it means for people in many countries could be flat incomes and not enough job generation to lower high rates of unemployment.

Moreover, a number of emerging economies face deeper malaise, and the huge eurozone economy is especially worrisome.

"The main subject is that of growth, globally, but the principal focus here is the question of European growth," said French Finance Minister Michel Sapin.

The issue is what tools are available to avoid "what is described as a risk of recession," he said.

The IMF earlier this week cut its baseline forecast for growth in the 18-nation euro area to 0.8 percent this year and 1.3 percent next year. But with deflation a growing threat and demand and industrial output falling even in eurozone powerhouse Germany, a worse outcome is possible.

Lagarde said only a "very modest part" of the European slowdown can be blamed on the Ukraine crisis and the economic sanctions western Europe and the United States have placed on Russia.

If the eurozone continues to stall, IMF chief economist Olivier Blanchard warned on Tuesday, "it would be the major issue confronting the world economy."

The IMF and World Bank are pressing governments to push reforms that will boost growth, and to target more spending on job-creating activities like infrastructure development.

That pressure in the eurozone focused on Germany, the region's powerhouse, to agree to power up growth and prevent a slide back into recession.

Germany "could afford to finance much-needed public investment in infrastructure primarily for maintenance and modernization, without violating fiscal rules," the IMF wrote in its new report on the global economy this week.

Speaking in Washington, however, German Finance Minister Wolfgang Schaeuble denied his country was contracting, and stuck to his opposition to higher spending to revive the eurozone.

More growth will not be "achieved by writing checks," he said.

Instead, he insisted that Italy and France -- both of which want to boost stimulus spending -- implement "essential structural reforms", and he cautioned against a further loosening of monetary policy by the European Central Bank.

"You can't always spend other people's money in a monetary union," he said.

But he appeared to leave some room to bend Germany's tough stance.

"We are the engine of growth in the eurozone," Schaeuble added. "We have to give more priority to investment."


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