IMF chief warns world economy risks “lost decade”

Thursday, 10 November 2011 00:00 - - {{hitsCtrl.values.hits}}

Reuters) - The head of the International Monetary Fund warned on Wednesday that Europe’s debt crisis risked plunging the global economy into a “lost decade” and said it was up to rich nations to shoulder the burden of restoring growth and confidence.

Christine Lagarde told a financial forum in Beijing 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,” Lagarde said. “Clouds on the horizon particularly in the advanced economies and particularly so in the European Union and the United States.”

“Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of 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.” The former French finance minister was speaking at the start of a two-day visit in China. Her meetings are expected to focus on efforts to contain the crisis in Europe, which has seen forced resignations of the prime ministers of Greece and Italy in the past week.

Before arriving in Beijing she had spent two days in Moscow, trying to convince Russia to chip in some of its petro dollars to boost bailout funds for the euro zone.

Eurpean policymakers are hopeful that big emerging economies, led by China, will invest some of their vast foreign exchange reserves in an expanded bailout fund designed to stop the debt crisis that has engulfed Greece and dragged down bigger economies such as Italy. But the so-called BRIC nations, comprising of Brazil, Russia, India and China, have so far been reluctant to invest directly in Europe’s rescue vehicle, 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 also needed a stronger currency.