By Howard Schneider
Washington Post Staff Writer
Thursday, July 8, 2010
Europe’s weakened economy is now the central threat to global recovery, as its countries struggle with heavy debt, banks face a reckoning over their lack of capital and growth is slowing, the International Monetary Fund said Wednesday in its first assessment of the world economy since a crisis over government borrowing in Greece.
While the agency estimated that growth in the United States and emerging Asian and Latin American countries remains on track, it scaled back projections for Europe and outlined a series of issues there that could — unless controlled — spark problems rivaling those that caused the 2008 collapse of Lehman Bros.
“Downside risks have risen sharply” in recent months, the IMF said. “The ultimate effect could be substantially lower global demand.”
In updating its World Economic Outlook, the IMF slightly raised its overall forecast for global growth, to 4.6 percent for the year, compared with 4.2 percent in its April report. The improvement was based on a stronger than expected performance in the first months of the year, particularly in Asia. The IMF said it also expected the United States to grow slightly faster than earlier predicted — about 3.3 percent this year and 2.9 percent next year, less than forecast by the U.S. Federal Reserve.
But the outlook for Europe was reduced, as the combined impact of government spending cuts, continued concern over national debt and uncertainty about the banking sector undermines an economy already lagging behind the rest of the world. The IMF projected that the 16 countries that share the euro as a currency will grow just 1 percent this year and 1.3 percent in 2011.
The report and an accompanying analysis of world economic stability emphasized how a problem that was considered limited in scope when it surfaced in Greece last fall eventually expanded to other European countries and is now one of the main issues facing the global economy. Governments across Europe are cutting spending and overhauling social programs in an effort to curb record levels of debt, and the Obama administration is studying similar U.S. measures.
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