Thursday, April 19, 2012

IMF: New Warning for Europe

"Austerity alone cannot treat the economic malaise in the major advanced economies." IMF

19th April, 2012

The International Monetary Fund has recently warned Europe over the Eurozone Debt Crisis which it fears could rise up again, any time, and can potentially send the global economy into another recession. The current debt crisis and global recession has left little options for policy makers to maneuver their respective economies. Such an environment, the IMF fears, could produce a 1930’s style economic depression. 

If all the European banks implement their austerity cuts at the same time, then they might trigger a global financial crisis by damaging asset prices, credit supplies and economic activity within Europe.  

The single European currency makes it harder for Eurozone economies to be more competitive in the international market. Olivier Blanchard, IMF’s Chief Economist, says that they are doing everything possible to make sure that no country leaves the euro. If however, any country decides to do so, then the results would be catastrophic not only for the relevant country but the entire region. The output of such a country would fall significantly while the value of sovereign bonds of other nations might also see a decline.

All the European countries facing the debt crisis and declining growth have started pursuing austerity measures to make their economies sustainable in the medium and long term. IMF has warned them by saying, “Austerity alone cannot treat the economic malaise in the major advanced economies.The smaller fragile economies, the IMF said, might suffer even more from austerity cuts as they might not be strong enough to sustain short term economic cuts.

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Global growth is expected to be around 3.5% in 2012, down from 3.9% in 2011. In the Eurozone, the current debt crisis will worsen as Europe might experience a small recession while output is expected to fall by 0.3% in the monetary union. As economies shrink, lending from banks will become more and more expensive. Many European firms who rely on these banks will find it difficult to operate

IMF has revised its outlook for Spain and expects it to be worse than it originally thought three months ago. Unemployment is expected to increase in all advance European economies.

Though Italy and Spain are at the centre of the financial crisis, UK’s finances are in even worse shape. IMF has reduced UK’s GDP growth and expects it to run a budget deficit of 8% for 2012 and 6.6% in 2013.  UK will continue to witness deficits until 2017. The deficit reduction plan of the Cameron government, it seems, is not working. UK might actually witness even more austerity measures. The good news for them is that global markets have still not looked at them with suspicion. Currently all eyes are focused on Italy and Spain while UK is considered a safe haven by most. Had it been a part of Eurozone then things might have been quite different.  

There is good news for some leading industrial G7 nations as well particularly US, Canada and Japan. They are expected to be the fastest growing of the G7 nations with growth expectations of around 2%. China’s growth rate is expected to fall to 8.2% in 2012 from its peak of 10.2% in 2010.

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World Economic Outlook (Magazine)
Published by IMF