IMF first deputy managing director David Lipton warned how European Union member states are at risk from economic disaster unless they “strengthen their defences” ahead of a potential downfall. He drew attention to interest rates being lower now compared to their level before the crisis struck in 2008, meaning there is less means to protect consumer spending. Among those EU countries of particular risk of “glaring vulnerabilities”, Mr Lipton highlighted Italy, which he said may have contracted further in the first quarter of 2019 after it slipped into recession in the second half of 2018. He said: “A serious recession could be very damaging for these countries, because they will be shown to be ill-prepared.
“Their weaknesses could present a serious setback for Europe’s goal of convergence of standards of living, productivity, of national well-being.”
Speaking during a conference in Lisbon, the IMF economist said the eurozone needs to better prepare for financial doom so it can “respond to macroeconomic shocks and improve the fiscal-monetary policy mix”.
If it takes no action, the euro area “will remain over-reliant on monetary policy for stabilization and too much of the burden of crisis response will fall on individual countries, with their ability to respond depending on each country’s fiscal space”.
Mr Lipton said Brexit was also breeding uncertainty in Europe and beyond.
He added: “While most baseline forecasts show some recovery ahead for Europe, many have been surprised by the size and pace of the recent deceleration.
“So, it is important to acknowledge the continuing uncertainty about the coming year, including with the crucial issue of Brexit still unresolved.”
The biggest risk to the global economy was highlighted as the US and China, which have been engulfed in a trade war for much of the last eight months.
The trade dispute has affected the flow of billions of dollars of goods between the biggest and second biggest economies in the world.
Mr Lipton reassured the problems facing the economy are further spread than Europe alone.
He said: “Obviously, this is not a matter for Europe alone.
“The United States needs to get its fiscal house in order as well.
“US-China trade tensions pose the largest risk to global stability.”
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