Fiscal fragility

The International Monetary Fund sent a sober message to members of the eurozone on Friday, warning that debt-ridden European countries were "playing with fire."

In the IMF's latest report on world economic output, Europe was told unless sovereign defaults were averted, global recovery could collapse.

"There are very clear risks to the recovery," said Olivier Blanchard, the IMF's research director.

The debt trouble risks "derailing the European recovery and perhaps even the world recovery," he said. "The stakes are very high."

He added that the European Union must take immediate action to resolve the mounting debt problems and ease the rising concerns among investors.

Call for urgent action

The IMF report recommended that policymakers "act now to make the financial system more robust."

"The current window of opportunity to prepare the financial and economic system against potential systemic shocks, importantly by providing clarity on euro area-wide solutions to strains in the periphery, could close unexpectedly," the report said.

Greece has edged closer to default in recent months was cited as a particular threat to neighboring European economies.

"If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States," said Jose Vinals, director of the IMF's monetary and capital markets department.

The United States was also warned it had to get its fiscal house in order to avert global crisis, while emerging economies in Asia and Latin America were alerted to the risk of "overheating."

Disappointing growth forecasts

The IMF lowered its global 2011 growth forecast slightly, citing the emergence of bigger threats to growth since the previous report was released in April.

It cut the global growth forecast to 4.3 percent from the 4.4 percent growth projected two months ago, but offered a degree of reassurance by stating that the slowdown of recent months should be "temporary."

"Greater-than-anticipated weakness in US activity" meant that the US growth has declined since the beginning of the year, the IMF said. It slashed its growth forecast to 2.5 percent this year, from a predicted 2.8 percent growth forecast two months ago.

Negative growth was also predicted in Japan after the earthquake in March caused "stronger than anticipated" disruptions.

Germany forges ahead

The IMF, however, raised its growth view for the euro zone in 2011 from 1.6 percent to 2.0 percent, mainly thanks to "more upbeat investment in Germany and France."

Germany, Europe's economic powerhouse, was shown to be particularly strong in the report and is predicted to have the strongest surge of any of the Group of Seven rich countries.

The fund raised its forecast to 3.2 percent from 2.5 percent. The French economy was projected to grow 2.1 percent.

Author: Charlotte Chelsom-Pill (AFP, Reuters)

Editor: Sean Sinico