An IMF communiqué noted the epicenter of the current global financial markets is in the Euro area, where fears of a possible default by Greece on its mounting debts, with a likelihood of other distressed peripheral countries taking the cue, have sent shock waves across global markets in recent weeks. The United States told European leaders that the threat of “cascading default, bank runs and catastrophic risks must be taken off the table”, as otherwise it would undermine the already fragile economic recovery. For USA, it is all the more essential that European woes do not further complicate its tough domestic economic management.

No action plan was laid out in the communiqué of IMF comprising Finance Ministers from leading economies who, however, saw encouragement in “the determination of our Euro-area colleagues to do what is needed to resolve the Euro-area crisis”. They noted that IMF “stands ready to strongly support this effort as part of its global role,” as underlined by the Fund managing Director, M. Christine Lagarde. It is the repeated failures on the part of Euro-zone leaders in moving decisively, deferring actions, that have prolonged the uncertainty.

According to the communique, advanced economies are at the core of an effective resolution of current global stresses. The Ministers collectively agreed “to act decisively to tackle the dangers confronting the global economy. These include sovereign debt risks, financial system fragility, weakening economic growth and high unemployment”. However, what was seen as critical was the implementation by the Euro area of the July 21 decision to increase the flexibility of the European Financial Stability Facility, maximise its impact and improve the Euro-area crisis management and governance. IMF also favours stronger supportive role by the European Central Bank. Now USA or other leading nations and IMF, and markets in particular, are awaiting the next steps from Euro-zone leaders whose earlier July proposal for an expanded financial stability facility is being voted by individual parliaments.

In apparent reference to USA, the IMF communique said the strategy should be to restore sustainable public finances while ensuring continued economic recovery. A divided Congress has stalled progress on President Obama’s balanced package of deficit reduction over the coming decade, given the Republican opposition to any tax increase. The President, facing reelection in 2012, has taken his plan to the country with the warning that the Republican stand against investments for job creation investments in education and infrastructure would “cripple” the economy.

The global economic slowdown and its negative dimensions for all countries were forcefully brought out by the Prime Minister Dr Manmohan Singh in his address to UN General Assembly in New York. Economic, social and political events in different parts of the world have coalesced together and their adverse impact is now being felt across countries and continents. Recessionary trends in the traditional engines of the global economy – such as the United States, Europe and Japan – which have also been sources of global economic and financial stability are affecting confidence in world financial and capital markets. These developments are bound to have a negative impact on developing countries which also have to bear the additional burden of inflationary pressures, the Prime Minister said.

In a series of interventions during the Fund-Bank meetings as well as those of G-20 and BRICS, Finance Minister Mr Pranab Mukherjee emphasized the importance and urgency of “responsible macro-economic and financial policies” by advanced economies by avoiding creation of excessive global liquidity and undertaking structural reforms to achieve job-oriented growth and reduce imbalances. His exposition was reflected in BRICS communique which said such liquidity from “aggressive policy actions” taken by central banks to stabilise their domestic economies had been spilling over into emerging markets. This triggered volatility in capital flows and commodity prices.

'The contribution of BRICS countries and other emerging market economies to global growth is rising and will increase further. However, global rebalancing will take time and its impact may not be felt sufficiently in the short-term. We will also work to intensify trade and investment flows among our countries to build upon our synergies' the communique said. They were taking necessary steps to sustain growth, maintain financial stability and contain inflation. “We are also determined to speed up structural reforms to sustain strong growth which would advance development and poverty reduction at home and benefit global growth and rebalancing”.

Brazil had floated the idea of BRICS countries taking a part in helping debt-distressed countries in EU, perhaps keeping Greece in view in the main, now facing a likely default. It had not evoked any enthusiasms from Brazil's partners. Brazil might still be for it and to accommodate differing perceptions, apparently, the communique BRICS could consider “making additional efforts in working with other countries and international financial institutions in order to address the present challenges to global financial stability, depending on individual country circumstances'. Despite its three trillion and odd reserves, China does not want to get involved in any debt bail-out while India, with relatively lower and stagnant reserves, would not like to get into such ventures at present.

Mr Mukherjee addressed a series of meetings - G-24 where he resumed the chair, G-20, BRICS and the Fund-Bank Development Committee. Here, he had to weigh the implications and consequences of the current global economic slowdown and European sovereign debt problems on the growth prospects of India and other developing countries. He had to focus on what needed to be done at the global level to ensure that emerging economy leaders like India and China and other developing countries could ensure uninterrupted growth, even at moderate levels.

Mr Mukherjee viewed with concern the prospect, in the absence of effective actions by EU, of the sovereign debt crisis taking on global proportions resulting in a massive scale of fiscal liabilities and banking sector exposures. Any severe fiscal correction would lead to reduction in aggregate demand and hence trade. Capital flows to developing countries were still below pre-crisis levels and could go down sharply again in the event of financial market instability. Overall he voiced the setback to earlier expectations of countries like India growing strongly from 2011 onwards in line with their underlying potential growth rate. That would have helped them in addressing the core challenge of poverty eradication and improved standards of living for our people. Robust domestic demand growth would also have supported output in high income countries.

At the Fund-Bank Development Committee meeting, the Finance Minister referred to inflation gripping many developing countries with the prospect of further increases in international food and fuel prices, given the level of stocks at historically low levels and supply conditions in delicate balance in several countries. He recognized the role of the World Bank in food security assistance through its special facility and said poor countries would need a larger level of such aid. The Bank could also work towards creating globally accessible stocks to meet critical needs and continue to help in strengthening safety nets as well as in measures to enhance agricultural productivity and output for the long term. (IPA Service)