IMF: Global economic recovery fragile and risk of relapse high

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psst.. psst... class struggle is on its merry way.. perhaps.


The International Monetary Fund warned today that the European debt crisis could flare up again at any time and send the global economy back into deep recession.

Olivier Blanchard, the Fund's chief economist, said there was currently "an uneasy calm" following the tensions in financial markets at the end of 2011, with hopes of a gradual recovery dependent on keeping the single currency in one piece.

The IMF also gave the Bank of England the all-clear to add to its £325bn programme of quantitative easing if the UK economy struggles to recover from its longest and deepest recession of the post-war era. The Fund said that there was a risk of a 1930's style slump. "In the current environment of limited policy room, there is also the possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s."

Asked about the risks that a country would leave the euro, Blanchard said: "We are doing everything possible so that this does not happen."

The IMF's chief economist said membership of the single currency made it harder for countries to become more competitive, but added: "For the moment there is no plan B. The costs of one country leaving the euro unilaterally would be very big and would lead to a very large drop in output."

Blanchard said there would be contagion risks if one country departed from the single currency, and said this would be one of the circumstances in which the firewalls would be needed. There would be knock-on pressure on the sovereign bonds of other nations, he said.

At a press conference to mark the publication of the IMF's flagship World Economic Outlook, Blanchard, said: "In the fall, a simmering European crisis became acute, threatening another Lehman size event, and the end of the recovery.

"Strong policy measures were taken, new governments came to power in Italy and Spain, the European Union adopted a tough fiscal pact, and the European Central Bank injected badly needed liquidity. Things have quieted down since, but an uneasy calm remains. At any time, things could get bad again."

He added: "The main risk remains that of another acute crisis in Europe. The building of the 'firewalls', when it is completed, will represent major progress. By themselves, however, firewalls cannot solve the difficult fiscal, competitiveness, and growth issues that some of these countries face. Bad news on the macroeconomic or political front still carries the risk of triggering the type of dynamics we saw last fall."

"Further measures must be taken to decrease the links between sovereigns and banks, from common deposit insurance, to common regulation and supervision. Now that the fiscal pact has been introduced, Euro countries should also explore the scope for issuing common sovereign bonds."

In the absence of a euro meltdown, the IMF predicted that weak recovery was likely to resume in developed countries — including the UK — and to remain relatively solid in emerging nations.

Global growth was projected to drop from 3.9% in 2011 to 3.5% before rebounding to 4.1% in 2013. At the turn of the year, the Fund had feared a more pronounced drop in global growth as a result of the debt crisis in the eurozone but has now revised up its forecasts modestly for all regions.

The IMF said it expected growth in the UK to be 0.8%, little changed on the 0.7% recorded in 2011 but slightly higher than the 0.6% the Fund had pencilled in for 2012 three months ago. It left the 2013 forecast unchanged at 2%.

Noting that Britain's financial sector had been hard hit by the financial crisis, the Fund said activity would be weak in early 2012 before recovering. The Office for National Statistics will next week publish its first estimate for gross domestic product in the first quarter of 2012, with the City forecasting a small increase in activity.

"In the United Kingdom, with inflation expected to fall below the 2% target amid weaker growth and commodity prices, the Bank of England can further ease its monetary policy stance," the Fund said.

The eurozone is still expected to suffer a mild recession in 2012, with output falling by 0.3% and the outlook for Spain – the current cause for concern in financial markets - is now thought to be worse than it was three months ago.

"Because of the problems in Europe, activity will continue to disappoint in the advanced economies as a group", the WEO said, "expanding by only about 1.5% in 2012 and by 2% in 2013.

"Job creation in these economies will likely remain sluggish, and the unemployed will need further income support and help with skills, retraining, and job searching."

The IMF said the most immediate concern was a further escalation of the euro area crisis leading to a "generalised flight from risk".

This, the Fund added could see output in the euro area fall by 3.5% over two years, with knock-on consequences for the world economy, which would see activity decline by 2% over the same period.

With most eurozone countries now subject to tough deficit-reduction plans, the IMF warned: "Austerity alone cannot treat the economic malaise in the major advanced economies."

It added that "sufficient fiscal consolidation" was taking place in Europe and said plans should be structured "to avoid an excessive decline in demand in the near term."

The US, Canada and Japan are expected to be the fastest growing of the leading G7 industrial nations this year, with growth of around 2%. China's growth rate, which dropped from 10.2% in 2010 to 9.2% last year is expected to ease further to 8.2% in 2012. Sub-Saharan Africa is forecast to keep up its recent 5%-plus growth rate.

The Fund said the low levels of domestic inflation meant there was scope for further action by central banks and said policy makers should guard against overplaying the risks related to unconventional monetary support.

"While unconventional policies cannot substitute for fundamental reform, they can limit the risk of another major economy falling into a debt-deflation trap, which could seriously hurt prospects for better policies and higher global growth".


http://www.guardian.co.uk/business/2012/apr/17/global-economic-recovery-fragile-imf

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Here's an article by the New York Times which covers the same subject-matter.

Tittled 'Debate Grows as Europe Fears Return of a Crisis'.


BERLIN — The European financial crisis has shown signs of reigniting in recent days, sharpening the debate between the champions of austerity and a growing chorus urging more expansionary policies to promote growth.
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Even the traditionally hard-line International Monetary Fund called on Tuesday for stronger European nations to ease the fiscal brakes by stretching out budget cuts over a longer period. But if that message was intended foremost for Germany, it seemed destined to fall on deaf ears: with two state elections coming up next month, Chancellor Angela Merkel is unlikely to shift her position, popular with voters, against additional help for the economies of struggling European partners.

“We don’t see the need that perhaps other countries see to boost growth through additional increases in expenditures,” said a senior official in the German Finance Ministry, speaking on the condition of anonymity.

“Instead, we see quite clearly, and will remind our partners about their responsibilities from Toronto,” the official said, referring to commitments made at the Group of 20 summit meeting in June 2010, “to cut their deficits in half and stabilize their debt levels.” At the same time, the official said that Germany hoped other countries would join in increasing the International Monetary Fund’s resources to help it combat the crisis.

Politics as much as economics is adding to the sense of uncertainty in Europe. President Nicolas Sarkozy of France, who is trailing the Socialist candidate François Hollande in the polls before the first round of the presidential election on Sunday, has joined his opponent in promoting pro-growth policies. In Greece, nationalist anti-German fringe parties are gaining strength ahead of next month’s parliamentary election.

The German state elections may not directly affect the federal government in Berlin, but they distract from Continent-wide concerns and crisis management while thrusting parochial issues to the forefront. The German government does not have a mandate to share further the burden of the common currency on less competitive economies like those of Greece, Portugal, Ireland and, increasingly, Spain and Italy.

What seems certain, however, is that the crisis will continue to fester until new measures are taken to address its root causes. Borrowing costs for struggling southern European countries like Spain and Italy have begun to rise again as the effect of the European Central Bank’s injection of about $1.3 trillion in cheap loans into the banking system in December and March has faded much faster than expected. The three-year loans were meant to buy time for struggling governments and financial institutions, but the breathing room appears likely to be measured in months rather than in years.

The recent shift has underscored that there have been no substantive fixes beyond promises by countries to reduce their budget deficits. “It looks like it’s coming back with a vengeance, largely because none of the underlying problems have been solved,” said Philip Whyte, a senior research fellow at the Center for European Reform.

Mr. Whyte said that despite two years of crisis management, the fundamental structure of the euro zone remained intact, with lower-productivity economies in the south yoked to higher-productivity economies in the north, which prevents the laggards from competing through a currency devaluation.

“The E.C.B. bought time, but what it ended up doing was simply tightening the link between national banks and their sovereigns,” Mr. Whyte said. “They made the system more vulnerable if markets started losing faith in debt sustainability in countries like Spain.”

Yields on Spain’s 10-year bonds climbed above 6 percent on Monday, though they fell slightly on Tuesday after a successful auction of short-term debt by Spain’s treasury. Spain has emerged as the central test this year after missing its deficit targets as it slips back into recession. The government in Madrid has had a difficult time reining in spending by the 17 regional governments.

A bailout of Spain would be much costlier than one for smaller economies like those of Greece, Portugal or Ireland, testing the resources of the euro zone countries. Many economists, particularly in the United States, have argued that Spain has to stimulate its economy with additional spending if it hopes to return to economic growth, an argument rejected by the German government.

In an interview with the German newspaper Frankfurter Allgemeine Zeitung on Tuesday, Christine Lagarde, the managing director of the International Monetary Fund, said she was concerned about the health of Spanish banks and warned against slashing spending too quickly. It is not a view shared here in the German capital.

In an interview with Reuters on Tuesday, Germany’s finance minister, Wolfgang Schäuble, praised Spain for making difficult economic changes. “You don’t win back trust overnight,” Mr. Schäuble said, adding that Spain was following the right path by cutting spending. German officials have also recommended changes in labor markets as a longer-term strategy to promote growth.

As deficits balloon in countries across Europe, Germany continues to watch its deficits and financing costs fall. In another sign of Germany’s recent strength, the Bundesbank said on Tuesday that the country’s debt had fallen to 81.2 percent of gross domestic product in 2011, compared with 83 percent in 2010. That is still far above precrisis levels: in 2007, German debt was 65.2 percent of the size of the country’s economy.

“The problem with the crisis in Germany is that we know we have a crisis, but we don’t feel it,” said Eckart D. Stratenschulte, a political scientist and the director of the nonprofit European Academy Berlin.

Even as the European Central Bank loans improved market conditions, European leaders, including Ms. Merkel, were clear that they did not believe that the crisis was over. Many in Germany argue that a sense of crisis — and the elevated borrowing costs that come with it — is necessary to end out-of-control spending in the heavily indebted nations and to push through the economic liberalization they need to restore growth.

But the higher borrowing costs and austerity measures cut into growth, critics say, lowering government revenues in a self-defeating downward spiral and leading to higher interest rates and further budget cuts. “It’s concerning that the markets are again running out of patience and driving yields higher,” said Thomas Mayer, chief economist at Deutsche Bank in Frankfurt. “That creates further head winds.”

The I.M.F. on Tuesday raised its forecast for global growth slightly for the year. In Europe, the fund projected recovery in the second half of 2012, except for Spain, Italy, Greece and Portugal, where substantial improvement is not expected until next year.

The crisis, Mr. Mayer said, is like “a manic depressive moving between euphoria and worries, and now we’re in the valley of worries again.”






http://www.nytimes.com/2012/04/18/world/europe/debate-grows-as-europe-fears-return-of-fiscal-crisis.html?_r=1&ref=world

[ckaihatsu]

[T]he effect of the European Central Bank’s injection of about $1.3 trillion in cheap loans into the banking system in December and March has faded much faster than expected.


Jesus...!

If *I* lost one-point-three trillion that quickly at the casino I'd be *pissed* -- !

[Workers-Control-Over-Prod]

The EU Needs to centralise fiscal and inflationary/wage policies Now! "Marshal plan" to Greece, but these imperialists of France, Germany EU IMF are using neo-liberal economics within a currency union in which Greece cannot lower prices to get a boom. Bloody hell, even if Greece got a stimulus plan, it wouldnt work as Germany and France are unwilling to force their national capitalists to raise workers wages, instead of past 10 years of lower inflation in Germany and the north, hence lower prices in the north compared to southern countries who did not stagnate wages and inflation is higher. Shit, i have to really put my life's savings into commodities... fuck capitalism!

[piet11111]

Jesus...!

If *I* lost one-point-three trillion that quickly at the casino I'd be *pissed* -- !

A better way to look at it is if you gambled away 1.3 trillion bucks of someone else while having the time of your life and tons of free drinks in said casino to put it in perspective of the capitalists.
After all they didn't pay that money.

[ckaihatsu]

Jesus...!

If *I* lost one-point-three trillion that quickly at the casino I'd be *pissed* -- !





A better way to look at it is if you gambled away 1.3 trillion bucks of someone else while having the time of your life and tons of free drinks in said casino to put it in perspective of the capitalists.
After all they didn't pay that money.


Yeah.

(I meant it as if to juxtapose myself in place of the public at the casino table....)

[ckaihatsu]

Your username *says* "Workers control over production" but you're putting forth all of these *reform*-minded proposals.... It doesn't help the proletarian cause in the least to direct our attentions, and even anticipations, to what the ruling class may or may not do.

[Regicollis]

When are people going to recognize that those in power are not interested in the common good?

Even from a bourgeois point of view the response to the euro crisis has been a display of raging insanity - that is if you assume that their only concern is not lining the pockets of the financial aristocracy.

[Workers-Control-Over-Prod]

Your username *says* "Workers control over production" but you're putting forth all of these *reform*-minded proposals.... It doesn't help the proletarian cause in the least to direct our attentions, and even anticipations, to what the ruling class may or may not do.

No no, well, i just get carried away in theory. I debate a lot with economic counterparts about this crisis, and all the signs say pretty much that i am correct. But mind you, i would never support any reformist parties in europe, and the way it looks now, no left capitalist parties are strong in the EU to make that kind of change. Capitalist Destruction FTW!