Boosting liquidity and hoping for global growth will not resolve debt issues in the US and Europe, World Bank President Robert Zoellick said yesterday, adding that these mechanisms had “run their course.”
With French President Nicolas Sarkozy scheduled to meet German Chancellor Angela Merkel yesterday over the eurozone debt crisis, Zoellick said European leaders needed to deal with some fundamental and structural economic issues.
He said the European Central Bank, which is buying Italian, Spanish and other stressed eurozone government bonds and helping provide pressed banks with easier funding, was “doing its part.”
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However, “you have to get to the fundamentals,” he added,
“I think leaders are going to have to decide will they, as other European leaders have done, find a way to move forward a fiscal union that complements the monetary union,” he told journalists in Canberra. “My key message is that the process of providing liquidity, the process of kind of hoping that global growth is going to get everybody out of this, I think those prospects have run their course and that’s what markets are communicating.”
Zoellick said while the European decisions were for European leaders to make, he added that the broader international economy would be affected by the actions they took.
“It’s important for both Europeans, and those in the US, to understand others have a stake in this game,” he added in the joint press conference with Australian Treasurer Wayne Swan. “And that while these are European decisions for Europe, we’re part of an international economy and we all have a lot at stake.”
He repeated his view that the convergence of debt concerns in the eurozone and the US had placed world markets in a new danger zone, resulting in the wild volatility of markets seen in recent days.
“Some of the woes over debt in the United States and the eurozone trauma have unleashed a wave of uncertainty about the global economy,” he said.
Zoellick thanked Swan and other finance ministers for co-writing an article published in yesterday’s Financial Times newspaper that said a crisis in confidence in policymakers posed a greater challenge than any economic barrier.
Meanwhile, IMF managing director Christine Lagarde on Monday warned governments not to slash spending to avoid sparking a new recession and stalling the feeble economic recovery from the 2008 crisis.
“For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time, we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects,” Lagarde said in an opinion piece also published in yesterday’s Financial Times.
Lagarde’s comments came as pressure was rising — including from the IMF itself — on advanced countries like the US and Europe’s largest economies to trim their debt burdens and also as worries rose over slowing growth around the world.
In the US especially, domestic politics and the recent sovereign credit rating downgrade by Standard and Poor’s are pushing the government into drastic spending cuts, just as the economy appears to be stalling.
In France, where there are also worries of an S&P downgrade, the government is preparing spending cuts as well.
However, the IMF has encouraged the highly indebted, advanced economies to take a long-term view of deficit reduction and to implement both spending cuts and tax increases.
On Aug. 2, after US politicians struck a last-minute deal to raise the country’s statutory debt ceiling to avoid a default, Lagarde said that the country’s planned -spending cuts should be “appropriately phased” to avoid undermining economic growth.
Policymakers need a plan with “clear medium-term debt and deficit objectives,” she said, adding that new revenues had to be found in parallel with long-term cost reduction.
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