EU crisis 'to hit world economy'
Published 24/01/2012 | 20:02
A recession in Europe will slow the global economy this year, the International Monetary Fund (IMF) has predicted.
And world leaders should focus on growth more than budget cuts, the fund advised in its World Economic Outlook report.
The IMF forecasts global growth of 3.25% this year, slower than the 4% pace it projected in September. It said the 17 eurozone nations will shrink 0.5% this year. In September, the IMF had predicted 1.1% growth for the region.
Europe's recession should have only a modest impact on the United States and the IMF projects 1.8% growth for the year, unchanged from its September estimate.
Steep budget cuts will slow growth further and undermine market confidence, the IMF said. The global lending organisation's message runs counter to the push for budget cuts advocated by German Chancellor Angela Merkel.
"The world recovery, which was weak in the first place, is in danger of stalling," said Olivier Blanchard, the fund's chief economist. "The epicenter of the danger is Europe."
European governments should avoid extreme austerity measures - spending cuts and tax increases - in weaker economies, such as Italy and Spain, the IMF said. And healthier European countries whose governments are facing lower interest rates "should reconsider the pace" of their short-term budget cuts.
Mr Blanchard said: "The good news is that with the right set of measures, the worst can be avoided and the world can be set back on track."
IMF managing director Christine Lagarde made a similar argument during a speech in Berlin on Monday. Many European governments do need to cut deficits, Mr Blanchard said, "but at an appropriate pace".
The 187-member IMF conducts economic analysis and provides emergency lending to countries in financial distress. Its projections followed a similar mark-down in global growth estimates last week by its sister lending organisation, the World Bank.