Monday, August 15, 2011

World Bank president warns the global economy is approaching a new "danger zone".

The president of the World Bank, Robert Zoellick has warned that the deepening economic woes in the United States and Europe have pushed the world into a new "danger zone".

Listen to my interview with Robert Zoellick broadcast on the ABC's AM program here.
Mr Zoellick also believes a lack of confidence in America's economic leadership during the debt ceiling impasse with the US Congress was largely responsible the recent heavy falls on global sharemarkets.

And he urged international leaders to move quickly to restore the crisis in global confidence after Standard & Poor's removed America's AAA credit rating.

"I think we are entering a new danger zone and I think that confidence in economic leadership has been slipping and it will be important that the primary economic actors take steps both short and long term to restore that," Mr Zoellick told reporters after addressing the Asia Society in Sydney last night.

"I think the challenge has been for understandable political reasons, the European decision mechanism has continued to muddle along and put together packages that while are significant in their political difficulty, have not matched the test of the economic need and that, I think, contributed to the weakening of confidence."

Mr Zoellick also warned policy makers to continue foster free and open markets to ensure that protectionism does not re-emerge.

"In the short term it will primarily be dependent on actions such as that from the European Central Bank but over time it will require attention to some of the fundamentals and those fundamentals not only deal with sovereign debt and the challenges of basic competitiveness but they also deal with putting in effective growth strategies," Mr Zoellick said.

"Given the phase that we are now moving into we could face increased temptations of protectionism and the best defence against protectionism is to be on offence by opening markets."

Mr Zoellick said that while he expects the world to move toward a system of multiple reserve currencies, the US dollar will probably remain the principal one despite the Standard & Poor's downgrade.

And he signalled that China might not be prepared to pump additional stimulus into its economy, given rising inflation, and a possibly overheating property market.

The intervention of the Chinese government in 2008 and 2009 insulated China from the global downturn and in turn stimulated demand for Australian resources.

"China is totally capable of managing this but I think one of the side effects of the policy implemented a few years is that there are going to be some bad loans from the investment stimulation. I don't think it's got the same freedom of that degree." Mr Zoellick said.

Mr Zoellick also highlighted the strengths of the Australian economy which avoided the 2009 global recession because of structural reforms.

"Australia is in a much better position than other developed countries in part because Australia undertook a lot of the structural reforms," Mr Zoellick said.

"Whatever the policy decisions, and political decisions in Australia, it's in a better position along with the fact it's continued to pursue an open trade policy and take advantage of its position in the Asia-Pacific."


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