Markets pushed into ‘danger zone’

THE loss of market confidence in economic leadership in the US and Europe, coupled with a fragile recovery, have pushed markets into a new danger zone, something policy-makers have to take seriously, according to the head of the World Bank.

Speaking at the Asia Society dinner in Sydney yesterday, Robert Zoellick also said the global economy was going through a multi-speed recovery, with developing countries now the source of growth and opportunity.

“What’s happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries,” he said.

“I think those events combined with some of the other fragilities in the nature of recovery have pushed us into a new danger zone. I don’t say those words lightly... policymakers [must] recognise and take it seriously for what it is.”

Zoellick said dealing with the sovereign debt problem and some of the competitive issues in the eurozone was being done “a day late”, leaving markets worried that authorities are not ahead of the problem or moving in the right direction.

“That (worry) has accumulated and so we’re moving from drama to trauma for a lot of the eurozone countries,” he said.

On the US, Zoellick said it wasn’t fears the world’s biggest economy faced an imminent problem, but “that markets are used to the United States playing a key role in the economic system and leadership”.

He said efforts to cut US government spending should focus on the entitlement programme.

“Until they make an effort on those programmes, there is going to be continued scepticism about dealing with long-term spending.”

Zoellick said while market confidence has been hit, the real issue was whether this will spread to consumer and business confidence, something that is still unclear.