[A-List] US economy: IMF worried

["Michael Keaney" <michael.keaney@xxxxxx>]

IMF warns trade gap could bring down dollar

Charlotte Denny and Larry Elliott
Friday September 19, 2003
The Guardian

The International Monetary Fund yesterday warned that the colossal United
States trade deficit was a noose around the neck of the economy, emphasising
that the once mighty dollar could collapse at any moment.

Arguing that the world's big economies were already too dependent on the
willingness of American consumers to live beyond their means, the IMF said
the US could not continue to run a current account deficit of 5% of GDP.
The IMF's chief economist Kenneth Rogoff said that it was just a matter of
time before the gap closed, tipping the dollar into a potentially steep
fall.

"If we were looking at a poor developing country, the world gives them just
enough rope to hang themselves. A country like the United States, they give
them enough rope to tie the noose around their neck several times. But it
does happen in the end," he said.

In its twice yearly report on the world economy, the Fund warns that even a
controlled slide in the dollar's value is likely to slow US growth and
unless other countries picked up the slack, the global economy would suffer.

Mr Rogoff said the collapse of world trade talks last weekend in Cancun
could spell disaster for a global economy already too dependent on
unbalanced growth in the US. Describing the breakdown as a "tragedy", he
said global poverty would rise if protectionism took root in the world's
biggest economies.

Wars in Iraq and Afghanistan and heightened geopolitical tensions worldwide
after the September 11 attacks on the US would "unquestionably" hold back
growth in the decades ahead, Mr Rogoff told reporters.

The report was highly critical of Europe's stagnating economies, blaming
governments for failing to embrace deep structural reforms of their labour
markets and welfare states.

"Reforms to improve the competitiveness of European labour and product
markets could yield significant dividends in terms of regional output," the
report said.
It also warned that an overrigid application of Europe's fiscal rulebook
could push the eurozone deeper into trouble.

Chancellor Gordon Brown echoed the IMF's criticisms of the eurozone in an
article in yesterday's Wall Street Journal, arguing that the credibility of
Europe was at stake.

Demanding wide-ranging change to policies "that have held back our continent
for too long", Mr Brown added: "Reform is not just desirable, it is an
urgent necessity."
The chancellor said: "Having created a single market in theory, we should
make it work in reality - and help it spread competition, cut prices,
increase consumer choice and deliver higher productivity."

The impact of the stalled trade talks in Mexico on the fragile global
recovery will dominate this weekend's annual meeting of the IMF and the
World Bank in Dubai.
Mervyn King, the governor of the Bank of England, said yesterday: "The
failure of the talks in Cancun will cast something of a cloud over the
meeting.

"That is not a happy background in which to assess the durability of the
recovery."

Misalignments between the world's biggest currencies are also likely to
feature on the agenda, with the US hoping other countries will support its
campaign to get China to strengthen its currency, the yuan.

Following an upgrading of its growth prospects by the fund, the US is
expected to expand by 2.6% this year, the fastest of the big seven
economies.