IMF chief warns over 1930s-style threats

File photo of International Monetary Fund chief Christine Lagarde speaking at the International Finance Forum in Beijing on November.

Story highlights

  • IMF chief warned the global economy faces prospect of steep retratction
  • "Rising protectionism, isolation and . . . what happened in the 30s [Depression]"

The managing director of the International Monetary Fund has warned that the global economy faces the prospect of "economic retraction, rising protectionism, isolation and . . . what happened in the 30s [Depression]", as European tensions again flared over suggestions in Paris that the UK's credit rating should be downgraded before France's.

"There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating," Christine Lagarde said in a speech at the US state department in Washington. "It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.

She was speaking after the governor of France's central bank, in an attack on the "incomprehensible and irrational nature" of credit rating agencies, also angered London officials by suggesting the agencies should target the UK's rating rather than France's.

Christian Noyer, head of the Bank of France, said a French downgrade could not be justified by economic fundamentals. But in the event agencies did issue downgrades, he added that they should begin by first lowering the triple A rating of Britain, which "has bigger deficits, more debt, higher inflation, less growth than us and where credit is shrinking".

François Fillon, french prime minister, also took a swipe at Britain, saying its high debt and deficits had not been recognised by the rating agencies.

British officials were privately astonished by the remarks. A spokesman for David Cameron, UK prime minister, said: "We have put in place credible plans for dealing with our deficit -- the credibility of our plan can be seen in what happened with the interest rates on our bonds." A UK Treasury official added: "The markets clearly don't agree with Noyer."

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Despite the tensions, Britain, which last week vetoed a new European Union treaty for all 27 member nations, was granted observer status at talks on a new eurozone fiscal treaty. UK Treasury officials say the aim is to "police" the talks to ensure that any issues affecting the single market or London's financial industry are discussed by all 27 member states, but Britain will have no formal role in shaping the new treaty.

Mr Cameron has said he will look with an "open mind" at whether the European Commission and European Court of Justice should be allowed to give the new eurozone fiscal compact teeth. Britain wants to ensure that the EU institutions continue to protect the interests of all 27 member states.

Nick Clegg, deputy prime minister, hopes Britain is edging back towards a more constructive engagement in Europe, but Mr Miliband believes Mr Cameron has much more work to do to repair the UK's relations in the EU.

In an interview with the Financial Times, Ed Miliband, the opposition Labour leader in the UK, described Mr Cameron's European policy as "an act of economic vandalism", claiming that the UK's isolation at last week's EU summit in Brussels was a bad result. "He didn't get anything for the City of London, he left the City of London marginalised," Mr Miliband said.

Mr Miliband accused Mr Cameron of unwisely seeking to introduce more unanimous voting in the area of financial services, a policy which he said amounted to an attempt to "unravel the single market" of which Britain was a big beneficiary.

The Labour leader said he feared that by deploying his veto, Mr Cameron had stoked Tory euroscepticism on his benches and that 81 Tory rebels would step up their demands for a referendum on EU membership.

"I fear he doesn't understand the forces he's unleashed," Mr Miliband said. "The 81 and others won't think "let's stop now". He's reaped the whirlwind of the last five years and of his failure to modernise the party on Europe."

Mr Miliband said he would have stayed in the room in Brussels to negotiate a better deal, but did not say exactly what that would be.

In the last few days, Mr Cameron has called leaders who welcome a UK presence at the negotiating table, including Ireland's Enda Kenny, the Czech Republic's Petr Nečas, Sweden's Fredrik Reinfeld and Denmark's Helle Thorning-Schmidt. He is expected to make further calls to possible allies on Friday.

A UK government spokesman for Number 10 did not deny that the UK was trying to peel off countries from the pact, but said: "We were very clear after the summit that it would take some time to agree how to implement the EU arrangements and they have an objective of agreeing them by March."

Separately, a draft prospectus prepared for the eurozone bail-out fund includes investor warnings that the euro could break apart or cease to be a "lawful currency" entirely.