The implications have become most clear in Greece, where the government is trying to enforce an austerity plan that the IMF says is needed to restore growth — and which must be followed for the country to receive an upcoming disbursement of emergency funds.
The IMF studies released on Friday also cautioned that the lack of political progress on deficit reduction in the United States and Japan was weighing on a world economy characterized by strong growth in developing nations like China and continued weakness in the developed world.
That weakness has become more pronounced in recent months, with the U.S. recovery slowing and Europe saddled with a still vulnerable banking system and several countries near insolvent.
“We have entered into a new phase of the crisis that I would term the political phase, where hard political decisions need to be made because the window for substantial policy action is closing. Time is of the essence,” said IMF financial counsellor Jose Vinals at a press conference in Brazil.
On Friday, Greek Prime Minister George Papandreou struggled to cling to power as he worked to put together a new cabinet and persuade a restive country to stand behind a new round of spending cuts and other concessions needed for the release of emergency loans from the International Monetary Fund.
Papandreou announced that he had replaced finance minister George Papaconstantinou — the public face of the government’s austerity push — with defense minister Evangelos Venizelors.
As Papandreou continued his cabinet reshuffle, there was some positive news for Greece from Germany. Chancellor Angela Merkel and French President Nicolas Sarkozy announced that Germany and France had reached a compromise regarding the bailout package they are preparing. Germany backed away from a provision that would have required private investors to be involved, saying their participation would now be voluntary. Sarkozy called the decision a “breakthrough.”
European stock markets, which had been declining since the chaos began in Greece, turned positive and the euro strengthened against the dollar.
But defections among Papandreou supporters left his governing coalition with a shrinking majority in the Greek Parliament. A call for a vote of confidence in his new government was expected this weekend.
The possibility that Papandreou will fail — and be unable to commit the country to an austerity program negotiated with the IMF and European officials — is considered one of the chief risks pushing Greece toward a default on its bond payments and what the Obama administration and others consider potentially calamitous economic fallout.