The IMF on Thursday stepped up its warnings over a possible eurozone recession, pressing governments like Germany to spend more to reverse a stall.
Worries about the eurozone stagnating were at the forefront as the annual IMF and World Bank meetings on the global economy began.
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 eurozone slipping back to a prolonged contraction at 35 to 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,” she said.
Lagarde emphasized that world economic growth overall was a firm 3.3 percent this year, and is set to speed up to 3.8 percent next year.
However, 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,” French Finance Minister Michel Sapin said.
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 eurozone to 0.8 percent this year and 1.3 percent next year.
However, with deflation a growing threat and demand and industrial output falling even in eurozone powerhouse Germany, a worse outcome is possible.
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 European powerhouse, to agree to power up growth and prevent a slide back into recession.
Speaking in Washington, 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.
Although 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.”
Meanwhile, frustrated with the US Congress’ refusal to vote through crucial reforms at the IMF, Lagarde on Thursday promised a show if they do — a belly dance.
The reforms, which aim to strengthen financial resources of the global crisis lender and give more voting power to emerging economies like China, have been endorsed by all the world’s economic powers but one.
During the annual meetings in Washington, Lagarde, the 58-year-old former French finance minister, offered up an incentive.
“I will do belly-dancing if that’s what it takes to get the US to ratify,” she said. The dance will take place “the moment they do.”
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