IMF chief fears economic ‘lost decade’

European leaders have urged China to invest in a fund to support eurozone’s struggling economies [AFP]

The head of the International Monetary Fund (IMF) has said that Europe’s debt crisis risks plunging the global economy into a “lost decade”, saying it was rich nations’ responsiblity to shoulder the burden of restoring growth and confidence.

Christine Lagarde told a financial forum in Beijing on Wednesday that European plans to bolster a rescue package for Greece were a “step in the right direction”, but that the outlook for the world economy remained dangerous and uncertain.

“There are clearly clouds on the horizon. Clouds on the horizon particularly in the advanced economies and particularly so in the European Union and the United States,” Lagarde said.

Speaking on the first of a two-day visit to China, Lagarde said Asia was not immune to the problems currently sweeping the eurozone. 

“Our sense is that if we don’t act boldly, and if we don’t act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability and potential collapse of global demand … We could run the risk of what some commentators are already calling the lost decade,” she said.

The “lost decade” reference carries echoes of Japan’s experience of persistent deflation, mounting debts and economic weakness through the 1990s and beyond after its real estate bubble burst – an outcome many analysts fear could be repeated given the debt and property origins of Europe’s problems.

Lagarde’s meetings are expected to focus on efforts to contain the crisis in Europe, which in the past week led the prime ministers of Greece and Italy to announce plans to resign.

Europe seeks Chinese help

The IMF chief has so far held talks with Chinese central bank governor Zhou Xiaochuan on the “global economic situation”, the People’s Bank of China said in a brief statement.

Hong Lei, the foreign ministry spokesman, said Lagarde would also meet “state leaders” but did not specify who they would be.

Lagarde said she was hopeful that the technical details of an EU plan to boost the European Financial Stability Fund (EFSF) – set up to bail out struggling economies in the eurozone – to about one trillion euros from its present 440bn euros would be ready by December.

European leaders have called on China, which has the world’s largest foreign exchange reserves at $3.2 trillion, to invest in the EFSF.

The head of the fund, Klaus Regling, has previously travelled to Beijing for talks about a possible contribution, but China has as yet made no firm commitment to provide financial assistance for the troubled eurozone.

Beijing remains sceptical and public opinion in China is firmly against bailing out countries that still enjoy far higher
average incomes than Chinese.

Before arriving in Beijing, Lagarde had spent two days in Moscow, trying to convince Russia to boost the eurozone bailout fund. But the so-called BRIC nations – Brazil, Russia, India and China – are still reluctant to invest directly in Europe’s rescue fund, preferring to contribute via the IMF.

Lagarde, speaking at an event organised by the Institute for International Finance – the global association of the world’s most important banks – also said that China needed to shift its growth model from being export-led to a more balanced one and that the country needed a stronger currency.