* Slowing global growth makes for fragile outlook as IMF/G20
meet
* EU leaders under pressure to foster growth, provide fiscal
road map
* Battles expected on new funds for IMF
* Emerging economies fight for greater say in global
agencies
By Stella Dawson
WASHINGTON, April 15 (Reuters) – Growth in emerging
economies is slowing and the recovery in the United States could
be losing some momentum, worrisome developments when European
leaders have yet to complete the repairs needed to shore up
monetary union.
The situation forms a vulnerable backdrop for finance
officials from the world’s leading economies, who gather in
Washington this week for the Group of 20/International Monetary
Fund/World Bank meetings.
The managing director of the IMF, Christine Lagarde, has
offered this blunt description: “The risks remain high; the
situation fragile.”
Stock markets have rallied the past few months on relief
that Europe averted a major financial crisis at the turn of the
year. Credit goes to the European Central Bank for pumping money
into debt markets, Greece for striking a debt restructuring deal
after long and torturous negotiations, and to Italy, Spain and
Portugal for embracing tough budgetary reforms.
But these actions have restored only a tentative calm.
A surge in Spain’s 10-year bond yields last week to test the
6 percent level last reached at the height of the euro zone debt
crisis in 2011 – a sign that investors are demanding higher
returns to compensate for perceived risk – has underscored this
fragility. Spain’s government bond auction on Thursday of
two-year and 10-year debt will offer a fresh test of confidence
in its economy.
The concern is that European Union leaders have imposed
too-rapid budget cuts on its deeply indebted members, stifling
growth today while doing too little to put the building blocks
in place to ensure healthy growth tomorrow. This leaves the euro
zone vulnerable to further market attacks.
“It is very important to avoid a vicious cycle of economic
contraction and budget cutting,” said Charles Dallara, managing
director of the Institute of International Finance, which
represents big global banks.
EU leaders have taken two important steps so far. They have
agreed on a new budgetary framework for EU members and set up a
$930 billion rescue fund to handle future sovereign crises.
But bankers and the IMF say what is needed next if Europe
wants to break the vicious cycle of financial contagion is for
leaders to lay out a clear road map toward fiscal integration
for the euro zone in the medium term, and the ECB to make clear
it will keep interest rates low in the short term.
Germany has resisted those steps, and even plans to take the
simpler steps toward fiscal union, such as issuing common
euro-zone bonds, are highly unlikely ahead of French elections
and an Irish referendum on the EU’s new fiscal treaty this
spring.
RIPPLES WIDEN
Meanwhile, growth has ground to a halt in France, and damage
has spilled into the emerging economies of Eastern Europe, whose
export industries are closely tied to euro zone markets.
Eastern European banks, many of which are owned by Western
European institutions, also are cutting back sharply on credit
supply, deepening the region’s woes.
China, the world’s second largest economy, is feeling the
pain as well. Its exports to the European Union, China’s largest
market, shrank by over 1 percent in the first quarter. That
contributed to China’s disappointing growth in gross domestic
product in the first quarter of 8.1 percent, the slowest pace in
almost three years and down from 8.9 percent in the fourth
quarter.
Brazil, which had been one of the world’s fastest growing
economies, is also is facing a sharp slowdown. Growth tumbled
last year to 2.7 percent, less than half its 2010 pace, and the
government has cut taxes, launched fresh attempts to weaken its
currency, and the central bank is cutting interest rates
aggressively to shore up growth.
The outlook for the United States, the world’s biggest
economy, was muddied after jobs creation in March came in at
only half the pace seen in the prior month, denting optimism
that U.S. growth was poised to accelerate. More data this week
could provide some clarity. Retail sales for March, to be
released on Monday, and industrial output and housing data, out
on Tuesday, are all expected to show modest growth continuing.
The IMF’s verdict on the global economy will be released on
Tuesday. That will be followed by the meeting of the Group of 7
rich nations on Thursday. The G20 finance ministers and central
bankers meet on Friday, and Europe is bound to face pressure to
show some willingness to move eventually toward fiscal union.
At the same time, a major battle is brewing over bolstering
IMF resources. The international lender, concerned that Europe
will not act quickly enough to prevent another sovereign debt
crisis from erupting on its shores, wants more firepower to help
countries fight financial crises.
The IMF is seeking up to $600 billion from its members. But
its funding request appears to be getting whittled down in size
and swept into a bigger battle by emerging economies demanding
greater voting power at the IMF, commensurate with their growing
economic clout.
Their case gains potency as the World Bank, the IMF’s sister
organization, looks poised to reject a Nigerian candidate to as
its new head. The U.S. candidate, Jim Yong Kim, a
Korean-American health expert, appears almost certain to win the
post when the World Bank board meets on Monday, holding fast to
the long-held tradition of having an American at the helm of the
World Bank and a European at the helm of the IMF.
These fights will add to uncertainty over whether world
leaders can draw a firm line under the financial crisis.
“I think politics may prevent much progress over the next
few months,” said Marc Chandler, global currency strategist at
Brown Brothers Harriman.
