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World Bank boss warns of ‘new danger zone’


Robert Zoellick says investors have lost confidence in economic leadership in Europe and the US

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International markets are entering a “new danger zone” as investors lose confidence in the economic leadership being shown in Europe and the US, according to the head of the World Bank Robert Zoellick.

Policy-makers need to take the recent market slump seriously and understand the severity of the situation, he told an Asia Society dinner in Sydney.

Zoellick said steps taken in the euro zone to deal with their sovereign debt crises and more general lack of competitiveness have tended to be taken “a day late” to ease investor concern.

He said there is likely to be a multi-speed global recovery, as an increasing proportion of worldwide growth comes from emerging economies and the traditional powerhouses of Europe and the US continue to struggle.

“What’s happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries,” he said.

“I think those events combined with some of the other fragilities in the nature of recovery have pushed us into a new danger zone. I don't say those words lightly.”

On the US, Zoellick said it wasn’t fears the world’s biggest economy faced an imminent problem, but “frankly that markets are used to the United States playing a key role in the economic system and leadership”.

He said efforts to cut US government spending have so far been focussed on discretionary spending as opposed to the entitlement programme such as social security. “Until they make an effort on those programmes, there is going to be continued scepticism about dealing with long-term spending.”

Zoellick said while market confidence has been hit, the real issue was whether this will spread to business and consumer confidence, something that was still unclear.

“What is different from the world of the past is now emerging markets are sources of growth and opportunity. About half of global growth is represented by the developing world... so this is a very rapid change in a relatively short span of time in historical terms,” he added.

On China, Zoellick said the appreciation of the yuan would be constructive, especially in helping tackle the country's inflationary pressure.

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World Bank boss warns of ‘new danger zone’
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