Red flags on global growth

Portuguese protesters against the government's austerity measures march down Lisbon's Liberdade Avenue.

DOHA // The sovereign debt troubles in the euro zone are threatening to smother the momentum of the global economic recovery, international politicians and economists warned. The risk of southern Europe's brewing financial crisis derailing the global economy's emergence from the slowdown is focusing the minds of economic and business experts gathering in Qatar's capital to discuss how to bolster the financial system.

"We are worried," said He Yafei, the ambassador and permanent representative of China to the UN. "The European debt crisis could imperil the fragile global economic recovery. China alone cannot provide enough impetus to move the global economy along." Europe accounted for about 20 per cent of global GDP, much more than China, Mr He added. Strengthening the international financial safety net and the creation of a watchdog to sound the alarm on dangers in the financial system are among proposals likely to be refined at the World Economic Forum Global Redesign Summit, which began yesterday. Policymakers meeting at the Group of 20 developed and emerging economies in November will be among international bodies urged to consider implementing the recommendations.

Spain has become the latest victim of the sovereign debt turmoil afflicting the euro zone, with a package of austerity measures announced last week insufficient to stop the country's credit rating being downgraded by Fitch Ratings agency. Despite a multibillion euro bailout of Greece and an emergency package to safeguard the currency, fears persist about the spreading of sovereign debt turmoil across southern Europe.

"The possibility of a double-dip recession depends on possible policy mistakes in the future," said Marios Maratheftis, the regional head of research for the Middle East, North Africa and Pakistan at Standard Chartered in Dubai. "The EU left things too late. Perhaps we have avoided the worst, but the bailout took too long." Economists warn that the financial turbulence in the euro zone is a painful reminder that little action has come out of the talk by policymakers about co-operating on multilateral reform of the financial system since the global recession.

The World Economic Forum yesterday published a report calling for an overhaul of the international system, including close international co-operation and governance across four themes covering the economy, development, sustainability and security. The report is the product of a year-long dialogue involving more than 1,500 academic, business, governmental and civil society experts and decision makers.

Among the 58 proposals in the report are a reinforcement of the global financial safety net through the reform of the IMF's international monetary and financial committee that would open the way for the provision of emergency liquidity in times of financial distress. The IMF is considering ways of changing its role within the global economy after being criticised for failing to predict the financial crisis.

Another recommendation is the establishment of a watchdog to oversee global systemic financial risk with the authority to sound alarms at the threat of trouble. A public-private financial risk information repository would improve the distribution of data between global banking regulators, it said. A review of regional free-trade agreements to ensure they are in line with the long-term aims of the multilateral trading system is another proposal. An international initiative to strengthen the quality of macroeconomic policy tools is another suggestion.

The delegates at the Doha meeting, which concludes today, will fine-tune the plans before they are submitted to global political and economic decision making bodies such as the Group of 20, which includes Saudi Arabia, and the UN. Officials in the Middle East, along with those in emerging markets in Asia, Africa and Latin America will have the chance to review the proposals at a series of forums organised by the G20 prior to its meeting in November in Seoul.

"Representatives of governments and policy institutions are asked to pick up these proposals and promote them," said Lord Malloch-Brown, the vice chairman of the World Economic Forum. [e-mail]