The boss of the International Monetary Fund, Christine Lagarde, has issued a fresh warning about the threat to the global economy from the European debt crisis, as the European lending markets remain paralysed.
In an interview with the French weekly newspaper Journal du Dimanche, Lagarde warned that the world was on the brink of an economic and financial failure as a result of the eurozone’s debt crisis. "The global economy is in a dangerous situation”, she noted.
According to Lagarde, Europe’s financial crisis is spreading into "a crisis of confidence in public debt and the soundness of the financial system.”
At the same time, slowing European economic activity is affecting global trade, and impacting on Europe’s main partner, the United States. Emerging countries, which have been the drivers of global growth for the past decade, have also felt the effects of the European crisis. Lagarde pointed out that growth forecasts for China, Brazil and Russia have been downgraded. "These countries which were locomotives are experiencing these destabilising factors”. Lagarde added that the IMF would cut its outlook global growth when it released its global economic forecasts at the end of January. The IMF had been forecasting global growth of 4 per cent.
Lagarde’s comments come amidst fresh evidence that Europe’s financial crisis continues to worsen. Last week, the European Central Bank provided €489 billion ($US633 billion) in three-year loans to cash-strapped European banks, but figures released overnight show that European banks have turned around and deposited a record €452 billion with the ECB. This is stark evidence that the European interbank lending market remains crippled, and that banks would rather earn the meagre 0.25 per cent interest rate that the ECB pays on depots, rather than running the risk of lending to other banks at much higher interest rates.
In the interview, Lagarde was critical of the efforts of European leaders to resolve the eurozone debt crisis, although she stopped short of directly criticising German Chancellor Angela Merkel and French President Nicolas Sarkozy She said the recent European Union summit, where European leaders pledged to move forward with fiscal integration and to adhere to stricter budgetary rules, had failed to reassure investors. "The summit of 9 December was not detailed enough on the financial aspects and was too complicated on the fundamental aspects.”
Lagarde also deplored the split between France, Germany and England. "It would be helpful if the Europeans would speak with a single voice and announce a simple and detailed timetable. Investors expect it. Big principles don’t impress them.’
She compared the current situation to the period between the two World Wars. "The period we are living in is like the 1930s in certain respects. At that time, countries turned inwards, and multilateralism declined. Today, we see some countries raising tariffs, and erecting non-tariff barriers and sometimes blocking capital flows.”
According to Lagarde, rising national self-interest is the main obstacle to overcoming the current crisis. "It is difficult to put in place strategies for international cooperation against the crisis. National parliaments are reluctant to put at risk their public finances or their government guarantees to support other countries.”
She added that around the world there was growing support for protectionist policies, and that the idea of "everyone for themselves” was gaining ground.