The euro zone debt crisis still has a long way to go before it ends and Europe needs to keep faith in the single currency, International Monetary Fund deputy managing director Zhu Min said on Tuesday.
“Overall I would say the crisis is not over. We are still in the middle of it and there is some way to go,” Zhu told a World Economic Forum meeting in the Chinese port city of Tianjin.
“But it is moving in the right direction – that’s very important. We should have confidence, and we should have confidence in the euro,” he added.
Europe’s debt crisis has festered for more than three years, and investors widely expect the 17-member euro zone economy to slide into recession this year as a result of the failure to solve the crisis and engineer a recovery.
A second European recession in three years would be bad news for the global economy, Zhu said.
“We should not underestimate the negative impact from the European crisis to the whole world. This is very important,” he told an audience of international business leaders gathered for an annual meeting in China.
“The growth side [of Europe’s crisis] has a profound impact on the global economy,” Zhu said, adding that IMF models predicted as much as 1.5 per cent to 2.0 per cent being cut from economic activity in the US and Japan and 1 per cent from activity in China if there was a further deterioration in Europe.
Meanwhile the impact on Asian trade could be dramatic as Europe buys about one third of the region’s valued added exports.
“When the growth in the euro area drops to zero, you will see export growth from this region drop to zero too. This is very important,” Zhu said.
Falling demand from Europe has been a serious drag on Asian economic activity this year, compelling governments around the region to step up investment and other spending to stimulate domestic demand to compensate for the external decline.
Zhu said it was important to have confidence in the ability of Europe to solve its problems and called on the rest of the world to support efforts undertaken to get the economy back on a growth path.
To that end, he said the IMF strongly supported the recent decision by the European Central Bank to take more measures to boost stability of the euro zone economy.
The ECB last week unveiled a plan under which it would stand ready to buy any amounts of sovereign debt with a term of up to three years, thereby ensuring a government’s access to funding, in return for a bailout deal with tight strings attached.
“The ECB’s decision is very important. We strongly support it. It is very important to ease liquidity tensions in the market,” Zhu said.