EU, US stabilise but risks remain

The global economy has stepped back from the brink of danger and signs of stabilisation are emerging from the eurozone and the US, but high debt levels in developed markets and rising oil prices are key risks ahead, the IMF said yesterday.

“The global economy may be on a path to recovery, but there is not a great deal of room for manoeuvre and no room for policy mistakes,” IMF managing director Christine Lagarde said in a speech in Beijing.

In a separate talk yesterday, Ms Lagarde said China’s yuan could become a future reserve currency, adding that the country needed a roadmap for a stronger, more flexible exchange rate system.

She said signs of stabilisation were emerging and starting to show that policy actions taken in the wake of the global financial crisis were paying off, that US economic indicators were looking a little more upbeat and that Europe had taken an important step forward in solving its crisis with the latest efforts on Greece.

“On the back of these collective efforts, the world economy has stepped back from the brink and we have cause to be more optimistic. Still, optimism must not lull us into a false sense of security. There are still major economic and financial vulnerabilities we must confront,” she said.

The IMF chief said still-fragile financial systems, burdened by high public and private debt, persist in advanced economies and act as the first of three major risks.

“Second, the rising price of oil is becoming a threat to global growth.” she said. “And, third, there is a growing risk that activity in emerging economies will slow over the medium term.”

Ms Lagarde also said youth unemployment should be tackled and that all countries must persevere with their policy efforts if the progress made in stabilising the global economy is to pay off with better prospects ahead.

She said advanced economies must continue with macro-economic support and a balanced fiscal policy, together with financial sector reforms and structural and institutional reforms to repair the damage done by the crisis and to improve competitiveness.

Meanwhile, emerging market economies need to calibrate macro-economic policies both to guard against fallout from the advanced economies and to keep overheating pressures in check.

Ms Lagarde’s comments on the yuan as a reserve currency were the most direct endorsement to date by an IMF official of China’s ambitions for its currency.

“What is needed is a roadmap with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well-developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account,” she told a gathering of leading Chinese policymakers and global business leaders.

“If all that happens, there is no reason why the renminbi [another name for the yuan] will not reach the status of a reserve currency occupying a position on par with China’s economic status.”


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