Lagarde warns of 'global depression'

Thu, Dec 15, 2011, 00:00

No country is immune from an "escalating" euro zone crisis and each one must act to head off the risk of a global depression, the head of the International Monetary Fund said today.

IMF Managing Director Christine Lagarde, speaking at the US State Department, said the outlook for the world economy is "quite gloomy" and warned that failure to act collectively could lead to protectionism and isolation reminiscent of the 1930s depression.

"There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating," Ms Lagarde cautioned.

"It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action."

The IMF has warned that it is likely to cut its 2012 growth projections, with the economy struggling with a worsening two-year euro zone debt crisis and sluggish US growth. There are also signs from falling Chinese factory output that manufacturers are struggling with waning global demand and tighter credit conditions.

European leaders last week agreed to lend up to €200 billion to the IMF to help struggling euro zone states and are hoping non-European countries will also step in with loans provided through the global lender to help.

Meanwhile, the IMF said last night cleared the way for the next tranche of funds under Ireland’s €85 billion bailout programme.

This €3.9 billion round of funding is being released after the IMF executive board’s fourth review of Ireland’s economic performance.

In total, the IMF will provide €23 billion over three years. To date, the fund has given €13.07 billion. The latest tranche of funding was announced late last night.

Earlier yesterday, the Government was accused of scaremongering after Minister for Finance Michael Noonan warned a referendum on tougher rules for euro zone countries would inevitably turn into a vote on whether Ireland should remain in the euro.

Mr Noonan, speaking after a visit to London, told The Irish Times he would prefer if a referendum were not necessary as it would be seen by the world as a vote on whether the Irish want to stay part of the single currency.

Fianna Fáil said Mr Noonan was being alarmist and accused him of trying to silence criticism and brow-beat people who were concerned about last week’s EU deal.

Mr Noonan said Ireland did not have a problem with the new governance regulations for the euro zone and a fiscal control Bill which had already been drafted went further than required in certain respects.

“So my personal wish is that it can be done without constitutional change. But if constitutional change is required [then] we will have a referendum and we will put the case to the people and it will come down to whether one wants to continue in the euro, or not.

“Because in the nature of referendums, the issue itself might be complex, about new governance rules for the euro, [but] in the practical politics it will be dealt with in shorthand and the shorthand will be, ‘Do you want to maintain Ireland’s position as a euro zone country’. ”

The Minister said it was too early to say, without seeing the draft treaty, whether it would have to be put to the people.

“I am not even convinced yet that there will have to be a referendum.

We haven’t seen drafts yet. But what I am saying is that, in practical politics, if there is a referendum the wider issue of Ireland’s future in the euro zone will become an issue, even though the actual question that will be put to the people will be about the governance rules for the euro.”

Asked if his comments could be seen as a threat, he said he had not raised it, but had responded to a question during a Bloomberg newswire interview. During that interview he expressed confidence in the future of the euro.

“If you look at the history of the currency when it was put in place 12 years ago it has gone up in value, it has increased inter-European trade by 50 per cent. It has been a better antidote to inflation than the German mark because inflation has stayed below 2 per cent for each of the 12 years.”

Fianna Fáil finance spokesman Michael McGrath accused him of irresponsible scaremongering. “Michael Noonan’s extraordinary intervention on the question of whether or not there should be a referendum on the new proposed intergovernmental agreement is an insult to Irish people’s intelligence,” he said.

He said Mr Noonan’s assessment was not based on any sound legal analysis but was a highly political and deliberate attempt to silence legitimate criticism and browbeat those who strongly supported euro membership but had genuine concerns about the deal agreed last week.

“The fact that the Minister’s language mirrors almost exactly the proposition used by France and Germany to scupper recent plans for a referendum in Greece will not be lost on people,” said Mr McGrath.

He added his party leader had said the problem with the deal was that it would actually undermine the euro project by trying to solve the wrong problem.

Additional reporting Reuters