The United States and Europe need to speed key political decisions to help keep the weakening global economy from sinking under high debt and unemployment, International Monetary Fund Managing Director Christine Lagarde said on Monday.
The ongoing crisis in Europe, U.S. fiscal problems and a developing slowdown in Asia are threatening even deeper problems, Lagarde said, and have triggered new worries about waning momentum for action still needed to address some of the issues behind the 2008 financial crisis.
“We need a sustained rebound, not a bounce,” in global growth, Lagarde said in an address at the Peterson Institute for International Economics in advance of IMF meetings in Japan next month.
Recent actions by major central banks have helped buoy growth and provided “an opportunity to make a decisive turn in the crisis,” she said. “But we should not get ahead of ourselves. The global economy is still fraught with uncertainty, still far from where it needs to be.”
Data released Monday added to the sense of slowdown. A closely watched index of German business optimism slid for the fifth straight month — a poor showing among entrepreneurs and investors in the euro region’s largest economy.
Lagarde’s remarks focused on the political risks for the economic recovery — the seemingly stalled debate over fiscal policy in the United States and the protracted efforts by European policymakers to prove they can keep the euro currency union intact. Weak growth in the developed world is adding to the slump in important developing countries, and the problems in Europe are widely regarded as the major threat to the world economy. In each case, Lagarde said, political bickering and delays in decision making have made matters worse.
Over the summer, the IMF cut its world growth forecast to 3.5 percent for 2012, and it is likely to trim it again during the Tokyo meetings. Lagarde said the downward trend has been evident for a year.
The problems around the world threaten to reinforce each other: The crisis in Europe, for example, means fewer exports for China; slowing growth in that country, the world’s second-largest economy, means fewer import orders from the United States. The approaching U.S. “fiscal cliff,” and its threat of dramatic government spending cuts, could have global ripple effects, too.
Central-bank policy has been a main prop for developed countries, with the U.S. Federal Reserve and the Bank of Japan announcing rounds of “quantitative easing” to pump money into those economies and the European Central Bank approving plans to ensure that governments can finance their operations.
But that may prove only a temporary salve, Lagarde suggested, without more steps to reignite growth in Europe and address fiscal problems in the United States.
Policy changes in Europe are proceeding fitfully, with plans for broader banking oversight incomplete and financing plans for Greece, Spain and some other countries still in doubt.
In the United States, the automatic budget cuts slated for next year if Congress and the Obama administration do not agree on an alternative could put the country back in recession, the IMF has warned. Though no agreement is expected before the November presidential election, “we all hope that political clarity emerges soon, and with it actions to avoid the fiscal cliff,” Lagarde said.