IMF Warns Of Economic Instability Ahead

IMF Managing Director Christine Lagarde is criticising European leaders for failing to speak with one voice on the eurozone crisis.

“The world economy is in a dangerous situation,” Reuters quoted the former French finance minister as telling Paris-based weekly newspaper Journal du Dimanche in an interview published on Sunday (December 25th).

The debt crisis in the eurozone, which began with Greece in 2010 and eventually engulfed more and more members of the 17-nation club of EU countries using the euro, is seen as the biggest threat to the global economy.

Efforts to deal with the turmoil inside the area over the past 12 months have failed to calm world financial markets. Even the general agreement to strengthen financial consolidation within the club that was reached at the EU summit on December 9th had only a short-term positive effect, as European leaders have yet to work out the details of the deal by March.

The debt crisis, which has eroded public trust in governments, politicians and markets, “is a crisis of confidence in public debt and in the solidity of the financial system”, Reuters further quoted Lagarde as saying.

“The December 9th summit wasn’t detailed enough on financial terms and too complicated on fundamental principles,” she noted. “It would be useful for Europeans to speak with a single voice and announce a simple and detailed timetable. Investors are waiting for it. Grand principles don’t impress.”

The crisis, which will continue in 2012, has already had a negative impact on key emerging countries, like Brazil, China and Russia, which had helped drive global economic growth before the crisis, the French financier also said.

During a visit to Nigeria last week, Lagarde said the Fund could revise downward its 2012 growth forecast for the world economy, previously set at 4%.

Words of caution came also from IMF Chief Economist Olivier Blanchard, who wrote in a 2011 review on December 21st that “the recovery in many advanced economies is at a standstill, with some investors even exploring the implications of a potential breakup of the eurozone, and the real possibility that conditions may be worse than we saw in 2008.”

Suggestions that the eurozone could indeed break up were first heard a few months ago, as the crisis continued spreading and threatened to affect European power houses Germany and France.

The euro went into circulation in the EU on January 1st 2002, with 12 of the then 15-member Union joining the eurozone at the time.

Two Balkan countries, Montenegro and Kosovo — which was still run by UNMIK — became the first places outside the EU to adopt the euro as well, switching from the German mark they had earlier chosen instead of the dinar. Today, the common currency is widely used in the other former Yugoslav republics as well and many in the region still trust it will survive the current storm. If it doesn’t, they are ready to return to the German mark.

But, a decade after the official entry into force of the euro, none of the ten EU nations still outside the eurozone appear keen to join it any time soon, according to a series of AFP reports published on Tuesday (December 27th).

Bulgaria, for example, which is expected to meet the entry criteria next year, has made clear it will not rush to enter the European Exchange Rate Mechanism (ERM II), the eurozone’s two-year waiting room. Public opposition to the adoption of the euro in countries like the Czech Republic and Poland runs at between 70% and nearly 75%, according to the AFP.