Thursday 18 December 2014

Europe has a bright future, IMF's Lagarde tells Davos

Thomas Molloy Davos

Published 24/01/2013 | 05:00

International Monetary Fund (IMF) chief Christine Lagarde addresses the annual meeting of the World Economic Forum (WEF), next to WEF founder Klaus Schwab (L), in Davos. Photo: Reuters
Taoiseach Enda Kenny and Finance Minister Michael Noonan ring the bell to open the Europe stock exchange. Photo: Reuters
Taoiseach Enda Kenny, poses for photographs before ringing the bell to open the Europe stock exchange during the annual meeting of the World Economic Forum in Davos. Photo: Reuters

EUROPE faces multiple challenges, such as bringing about deeper fiscal and banking union, but the continent's future is bright, IMF boss Christine Lagarde has insisted in Davos.

However, while Ms Lagarde spoke on the challenges facing the world, her officials in Washington published downbeat figures for growth in Europe this year.

Although it forecast an increase in growth in the rest of the world, the Washington-based IMF now sees the eurozone economy contracting by 0.2pc this year. Its last projections saw the economy expanding by that amount.

Trimming its forecasts for Europe, the IMF said the financial crisis was now coming to an end. The biggest risks facing the global economy last year had been dodged and "cautious optimism" on the outlook may now be warranted, said the IMF's chief economist, Olivier Blanchard.

"Optimism is in the air, particularly in financial markets, and some cautious optimism may indeed be justified," he said.

"Comparing to where we were at the same time last year, acute risks have decreased," he said, referring to the "fiscal cliff" in the United States and the threat posed by Europe's debt crisis.

The IMF now says the world economy will expand by 3.5pc this year – slightly less than the 3.6pc forecast in October

"Is Europe on the mend? Yes and no," Mr Blanchard said, commenting: "Something has to happen to start growth."

For the global economy, "this is better, but it is not great," he added. "In particular, the growth numbers are not enough to make a dent to the unemployment rate in advanced economies."

The IMF foresees Spain leading the contraction in the euro area, while growth slows in Germany. It did not published any new figures for Ireland.

While measures to stem the debt turmoil last year helped boost financial markets around the world and decrease sovereign bond yields from Spain to Greece, European officials now still face a recession and unemployment at a record 11.8pc.

The IMF warned that the region still posed a "large" risk to the rest of the world if efforts under way to strengthen its economies and work on a banking union slip.

The forecast for a second year of economic contraction reflects "delays in the transmission of lower sovereign spreads and improved bank liquidity to private sector borrowing conditions" as uncertainty remains over ending the turmoil in Europe.

The fund expects the region's outlook to improve and it forecasts a return to 1pc growth in 2014. It sees the world economy expanding 4.1pc next year, 0.1 percentage point less than it predicted in October.

In the US, it said, "underlying economic conditions remain on track". However, it cut its forecast for growth in the US economy this year from 2.1pc to 2pc and raised it by 0.1pc to 3pc next year.

Ms Lagarde said there were four major challenges facing the world.

"We are in the ante-chamber of a new economy," she said in an emotional speech that she dedicated to the woman raped on a bus in India and the schoolgirl who was shot by fundamentalist extremists in Pakistan.

The four challenges that will usher in a new economy, she said, are a growing sense of individual empowerment; a shift of power to Asia, which will be home to two-thirds of the world's population by 2025; shifting demographics and vulnerability to climate change.

Without changes to climate rules, she warned, "the next generation will be toasted, roasted and fried".

All advanced economies face threats if they do not keep up reform momentum, she said, adding: "Those are clearly the key areas of risk."

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