World Bank President Robert Zoellick indicated that risks to the global economy are intensifying, with the euro region’s outlook dependent on European leaders making the right decisions.
“We are moving into a dangerous period,” Zoellick said in an interview with Bloomberg Television in Singapore today. While the U.S. is likely to avoid a return to recession, escaping with slow growth, the euro zone is facing a “particularly sensitive time,” he said.
Zoellick’s comments add pressure to European officials who have yet to contain a sovereign debt crisis that threatens to engulf Italy, whose government bonds in euros have tumbled for a record 11 straight days. Finland has sown division among policy makers by seeking collateral for loans to Greece, the first of the three euro-region nations to receive bailouts so far.
Asian stocks and U.S. futures fell and the euro slid for a fifth day against the Swiss franc on concern Europe’s debt crisis is worsening. The MSCI Asia Pacific Index dropped 1.7 percent at 3:15 p.m. in Tokyo, with financial shares following a slump in bank stocks in Europe as the cost of bank default insurance surged to records.
Concern that the global economy will fall into another slump has risen in recent weeks. The chance of a recession in the euro zone has risen to 50 percent and there’s “definitely” a risk that Europe will drag the rest of the world economy into a contraction, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said last week.
The U.S. and European economies are stalling and weaker global growth will have an impact on Asia, Singapore’s Minister of Finance Tharman Shanmugaratnam said at a conference today. Growth in the U.S. and Europe may be about 1 percent, he told reporters later.
“We’re already at stall speed in the U.S. and Europe, which means we’re now more likely than not to see a recession,” Shanmugaratnam said, without specifying the countries or regions at risk of a contraction. Companies are holding back spending and consumers globally are facing a loss of confidence, he said.
Zoellick played down the chance of a “double-dip” global recession in comments to reporters in Singapore today.
Still, “we are now seeing a particularly sensitive time in the euro zone,” the World Bank chief said in the interview. “A number of issues are converging.”
Ministers from Germany, Finland and the Netherlands will meet today to discuss a Finnish demand for collateral in a bailout for Greece, while the Italian Senate will debate an austerity plan amid a strike. Meantime, data today may show U.S. services industries grew at the slowest pace in more than a year, as markets there resume trading after Labor Day.
“I believe the U.S. will have slow growth, I don’t believe it will move to a double dip, but these things are very hard to predict because if you have events trigger uncertainty in Europe, that will flow back to the U.S.,” Zoellick said. The performance of the euro zone “depends on the political decisions moving forward,” he said.
The euro will survive in the next five years, while the question over membership of the common currency is one that Europeans have to answer, he said.
“Sometimes people hope that you can muddle through by providing financing and liquidity, in the case of Europe, from the European Financial Stability Facility or the European Central Bank,” Zoellick said. “They now recognize that’s not going to happen and instead what you see is with some of the weaker economies, that the austerity policies are pushing them into slower and slower growth and so this could be a downward spiral.”
Ireland, Latvia and the Baltic countries appear to be “on a better path,” he said. Spain has “taken a lot of important decisions” and Italy should be in a “sound” situation, he added.
The U.S. should address the rate of growth in its fiscal expenditure, Zoellick also said.
President Barack Obama said yesterday spending to rebuild the nation’s infrastructure is a key component of his plan to reignite the economy and boost hiring. He told a Metro Detroit Central Labor Council rally that the jobs agenda he’ll unveil in a speech to Congress on Sept. 8 will include proposals that previously have had support from both parties. Republicans, who control the U.S. House, have signaled resistance to new spending that would add to the federal budget deficit.