IMF’s Blanchard Says World Economy Has ‘Enormous Risks’ Now

European officials need to convince investors that European Union countries aren’t at risk of becoming another Greece as they forge ahead with their own deficit-cutting measures, said Olivier Blanchard, chief economist at the International Monetary Fund.

“There are enormous risks” in the global economy, Blanchard said today on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “Clearly the danger is in Europe,” he said. “First, you have to make clear that the other countries are not like Greece. On this, the news is actually quite good.”

He spoke after G-20 policy makers and central bankers late yesterday said they were “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.” Many urged Europe to implement a July promise to expand the powers of its rescue fund, Japanese Finance Minister Jun Azumi said.

“If you look at most European countries, they are taking very strong fiscal measures,” said Blanchard. European officials needed to convince the markets that the ECB’s rescue program was strong enough to ensure that countries like Italy can continue borrowing at current rates. “If they knew the ECB was in, they would basically say, OK, it’s fine.”

Carlo Cottarelli, director of fiscal affairs at the International Monetary Fund, earlier said that in the past year there had been, “particularly in Europe, a significant decline in budget deficits.”

High Debt

“Several countries, like France, like Italy, like Greece, have reformed their pension systems,” said Cottarelli. “Of course, the level of deficit in any country, the level of debt, is still high.”

Any plan by the bipartisan committee in the U.S. Congress to reduce the budget deficit would likely need to include tax increases, Cottarelli said.

“The magnitude of the fiscal adjustment in the U.S. is so large that it will be difficult to do only on the spending side,” Cottarelli said. “The bulk of it should be on the spending side and definitely should include reforms on entitlements.”

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