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27th Nov 2021

IMF chief warns of new Great Depression

  • Poverty and unemployment are on the rise in Europe (Photo: European Commission)

International Monetary Fund (IMF) chief Christine Lagarde has warned the Great Depression of the 1930s may repeat itself unless the EU pulls together and gets foreign help. Fresh unemployment statistics added to the gloom by highlighting the social cost of austerity.

“If the international community does not work together, the risk from an economic point of view is that of retraction, rising protectionism, isolation. This is exactly the description of what happened in the Thirties and what followed is not something we are looking forward to," Lagarde said in a speech delivered to the US State Department on Thursday (15 December).

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She said eurozone countries "obviously" need to make "adjustments" in order to overcome the debt crisis, but also appealed to non-European donors, just one day after the US Federal Reserve said it had no plans in contributing to a eurozone bail-out.

“It is really that Gordian Knot that needs to be cracked, that needs to be addressed as collectively as possible, starting with those at the centre but with the support of the international community probably channelled through the IMF,” Lagarde said, in reference to a pledge by all EU leaders except Britain to boost their contribution to the IMF by a total of €200 billion and also look for non-EU aid.

Russia has been so far the only country to come forward, pledging to support the IMF eurozone bail-out with $10 billion. Germany's central bank meanwhile has said it will agree to pay its share of the €200 billion sum - €45 billion - only if non-EU countries participate as well.

Neither is Europe's Central Bank willing to step up its bond purchasing programme to alleviate market pressure on Italy and Spain.

ECB chief Mario Draghi on Thursday ruled out such intervention, stressing that the limited purchases of Italian and Spanish bonds were "neither eternal nor infinite."

"I will never be tired of saying that the first response ought to emanate from the country," he said in a speech in Berlin. "There is no external saviour for a country that doesn't want to save itself."

Instead, he pressed for the fiscal discipline requirements agreed last week to be "swiftly implemented" and "put the euro area economy back on course."

He insisted that the solution of having the central bank step in and print money has not resulted in "stellar performances at all" when it comes to "unemployment, growth and especially inflation."

But neither are the EU-IMF austerity measures imposed on Greece, where unemployment has increased by 7.6 percent in the third quarter of 2011 compared to the same period last year. Nor in Romania, also under an EU-IMF programme, where employment fell by 4.6 percent, according to the latest figures published by Eurostat, the bloc's statistics office. Overall, EU unemployment increased by 0.1 percent in the third quarter.

And a fresh report from the European Commission combining employment and poverty data reveals that the crisis "has aggravated Europe’s structural weaknesses such as income inequality and the disappearance of medium-paid jobs, especially in manufacturing and construction."

According to the report, some 115 million Europeans - 23 percent of the population - were at risk of poverty or social exclusion in 2010.

The focus on austerity and budget deficits on Thursday was publicly attacked by the EU's employment and social affairs commissioner.

"I have had many opportunities in the recent period to criticise approaches that are not balanced, that just stress one element, which is austerity and discipline," commissioner Laszlo Andor said at a press conference unveiling the new poverty data.

Reducing public debt and deficits may be important, but "perhaps, in this period, the more critical elements should come from the other side," he added.

Andor last week tweeted that "automatic sanctions are a joke" and argued in favour of eurobonds and greater ECB involvement.

EU conference call to seek clarity on IMF funding

A conference call among all 27 EU finance ministers on Monday will seek to pin down commitments on the planned €200 billion contribution to the International Monetary Fund aimed at helping the eurozone.

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