Governments must brace for a prolonged period of “social unrest” due to the current financial crisis that has rendered millions of people unemployed, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn told representatives of the International Labour Organization (ILO) on Monday.
Presenting a bleak assessment of the deepening crisis, the IMF chief said there was no alternative but to face this “dire situation” head-on by adopting demand-stimulating policies.
He said the world economy would contract between 0.5 and 1 per cent this year, the first time in over 50 years. “The situation remains extremely worrying and difficult. It is the first setback for the world economy in over 50 years,” he maintained, suggesting that “bluntly the situation is dire” and the developed countries would shrink by about 3 per cent.
Kahn said much would depend on governments in the industrialised and developing world in adopting demand-boosting economic policies. Without fiscal stimulus packages there would not be a quick recovery as “monetary policies have reached their limits” and central banks are unable to revive growth, he warned during his address to the labour leaders and officials.
There has to be a concerted global plan to spend at least 2 per cent of the world expenditure on stimulus packages, he said, adding that leading economies will have to take a bigger share in implementing recovery policies as all countries are not in a position to generate funds needed to combat the crisis.
He said the world economy could come back on rails sometime next year provided governments implemented the demand-generating policies.
“Beyond unemployment, for many countries, it (economic crisis) will be at the roots of social unrest, some threat to democracy and may be, in some cases, it can also end in war,” the IMF chief warned.
In sharp contrast to Kahn’s pronouncements about the need to generate demand and adopt counter-cyclical policies, the head of the European Central Bank (ECB) argued against the need to spend more in Europe to address the global financial crisis.
ECB President Jean-Claude Trichet told The Wall Street Journal that governments need not adopt new policies until they fully implement what they had announced.
“Europe and the US should now, as efficiently and rapidly as possible, do what has been decided,” he told the WSJ, suggesting that “nothing will really work until the financial sector is back on track and ready to lend on a sustainable basis.”
Within Europe, there are deep divisions as to who should do what about the stimulus policies with Germany and France having turned their back to demands from the new entrants such as Hungary, Bulgaria, and Rumania for more assistance.
