Dubai: The IMF is expected to say in its World Economic Outlook, to be released this week, that instability in Europe and the United States has undermined the prospects for a strong recovery in the west and is expected to hit China, Japan and developing nations over the next six months, according to analysts.
But, despite warnings European leaders appear to be refusing to recognise or adequately respond to the seriousness of the situation.
"The otherwise fractious European Union leaders have united in their criticism of the markets, the IMF and now [US Treasury Secretary] Tim Geithner — for being honest about the scale of problems facing the Eurozone," Sony Kapoor, head of the Re-define think tank, told AFP.
Frantic week
En route to New York and a frantic week at IMF, World Bank and G20 gatherings, he said "[the policy of] ‘kill the messenger' seems to be the new strategy" for an EU "plagued by parochialism, pettiness and procrastination."
"This does not bode well for the ability of EU leaders to respond to the big and urgent challenge posed by the unsustainable borrowing costs facing Italy," the Eurozone's third economy, he said.
On Friday, in Wroclaw, Poland, Geithner warned that Europe's "governments and central banks need to take out the catastrophic risk to markets." However, in a put-down, European Central Bank chief Jean-Claude Trichet on Saturday said he didn't quite understand precisely what that "catastrophic risk" was.
As pointed out by German Finance Minister Wolfgang Schaüble and others, the United States is in a far worse position, both in terms of its annual deficit — tipped at 8.8 per cent this year, as against Trichet's 4.5 per cent — and its legendary runaway national debts.
Growing instability in the West is likely to affect the recovery of developing economies this year. The IMF expected to downgrade the growth of most of the world's major economies at its annual conference this week.
Christine Lagarde, the new IMF head, is expected to repeat warnings she made last week that European leaders and the US Congress must act to prevent a further deterioration in growth prospects next year.
As global markets await a decision on a potential monetary boost from the Federal Reserve, a fight looms tomorrow in the US Federal Reserve as policymakers wrestle over whether the threat of inflation should prevent them from feeding more money into the economy to boost employment.
While one camp on the Federal Open Market Committee is believed to favour a hopefully stimulative economic measure known as "Operation Twist," a group of vocal dissenters could block that.
Bond-buying tactic
Until data released on Thursday showed a surge in inflation, markets and economists had mostly expected that the FOMC would adopt ‘Operation Twist' — a 1961 bond-buying tactic named after the popular rock and roll dance of the time.
But with consumer prices having surged significantly in July and August, and the inflation rate now at 3.8 per cent year-over-year, analysts say the so-called inflation hawks might have power behind their argument that more stimulus would be dangerous.
Already anticipating a tough debate, the FOMC decided last month to extend the meeting to two days to weigh the evidence and the choices.
— with inputs from agencies
