New forecasts from the International Monetary Fund show that the European debt crisis is putting the brakes on global growth.
The IMF's latest World Economic Outlook update predicts world economic output to grow by 3.3 percent in 2012 and 3.9 percent in 2013, reflecting significant downward revisions from IMF forecasts issued in September. At that time, world output was expected to grow at around 4 percent in 2012 and 4.5 percent in 2013.
Leading the way downward is the troubled European Union. In today's update, the IMF noted that the euro area crisis "entered a perilous new phase" in the fourth quarter of 2011, intensifying global economic risks.
The IMF also now estimates that the euro area will contract by 0.5 percent in 2012, 1.6 percentage points lower than the IMF had forecast in September. While Germany and France are expected to maintain growth just above zero this year, Italy and Spain's GDPs are expected to contract by 2.2 and 1.7 percent, respectively.
At a press conference in Washington, D.C., IMF Economic Counsellor Olivier Blanchard stressed the spreading threat from Europe: "The epicenter of the danger is Europe, but the rest of the world is increasingly affected." He added that an escalated European crisis could pull global growth into negative territory. "In this case, the world could be plunged into another recession."
Greece is currently Europe's No. 1 concern as it teeters on the edge of default. Those fears have grown in recent days, as talks between Greece and its private creditors on a possible writedown of Greek debt have yielded no agreements.
In a speech in Berlin on Monday, IMF Managing Director Christine Lagarde advised European nations to pursue stronger growth in part by fighting unnecessary austerity. "On fiscal policy, resorting to across-the-board, across-the continent, budgetary cuts will only add to recessionary pressures." The question of austerity has created divisions among European leadership. While Germany has recently pushed for structural changes and budget cuts in countries with severe debt problems, Italian Prime Minister Mario Monti recently criticized excessive austerity, saying that it creates both economic and political problems, as the New York Times reported this month.
Lagarde on Monday also exhorted Europe to bolster its bailout mechanisms, the European Financial Stability Facility and European Stability Mechanism, by combining them. At the same time, she said the IMF would raise up to $500 billion in order to strengthen its lending capacity, but she stressed that IMF financing "is for all members, euro area or otherwise."
Not all of those members will be dragged down equally by Europe's woes. For example, the IMF made no revision to its United States 2012 growth forecast, leaving it at 1.8 percent. However, growth in emerging and developing economies is predicted to be at 5.4 percent, 0.7 percentage points smaller than previously estimated.