Euro currency could collapse and trigger another Great Depression, IMF warns for the first time



The eurozone could break up and trigger a global economic slump to rival the Great Depression, the IMF warned last night.



In its World Economic Outlook report, the International Monetary Fund said the collapse of the crisis-torn single currency could not be ruled out.



It was the first time the Washington-based institution has accepted the prospect of the eurozone splitting up and follows fears over the health of the Spanish economy.

Bad outlook: International Monetary Fund (IMF) Director of Research, Olivier Blanchard, warns that the eurozone debt crisis 'could get very bad again'

The IMF predicted a return to recession in the eurozone this year but upgraded its growth forecasts for Britain.



However, it warned that the world remains at risk of collapsing into a slump that would rival the Great Depression – with ‘acute risks in Europe’ the major threat.

‘Things have quietened down but there is a very uneasy calm,’ said IMF chief economist Olivier Blanchard. ‘I have a feeling that at any moment things could get very bad again.’



Speaking at the launch of the half-yearly report in Washington, Mr Blanchard said there was ‘no plan’ in place to deal with a country leaving the euro.



ALL EYES ON OSBORNE Chancellor George Osborne will face strong pressure to top up Britain’s contribution to the IMF when he arrives in Washington tomorrow. Following fears that Spain may be the next victim of the eurozone crisis, the IMF’s managing director Christine Lagarde is busy urging nations to hand over extra funds.

If Britain is to maintain its position as one of the Fund’s main shareholders, it will be required to contribute at least £10billion of taxpayers’ money.

Sweden, Norway and Denmark have already pledged to provide an extra £16bn of resources.

Japan is to contribute £37bn and the Americans have said they will chip in up to £125bn.

Speaking last night, Mrs Lagarde said that making sure the IMF had ‘sufficient resources to tackle economic crisis’ was in the ‘interests of all our members’.

Until recently, there had been a reluctance by many countries to contribute to a bailout fund designed to prop up ailing economies in Europe – the world’s richest region.

However Greece is widely expected to default on its crippling debts and quit the doomed single currency.

‘If such an event occurs, it is possible that other euro area economies would come under severe pressure as well, with a full-blown panic in financial markets,’ the IMF report said.

‘Under these circumstances, a break-up of the euro area could not be ruled out. This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.’

U.S. investment bank Lehman Brothers imploded in September 2008 – plunging the world economy into the worst recession since the 1930s. The IMF said that although ‘the outlook for the global economy is slowly improving again’ it is ‘still very fragile’.

It warned of the ‘possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s’.

The IMF forecast growth of 0.8 per cent in Britain this year – more than the 0.6 per cent it predicted in January, but less than last September’s target of 1.6 per cent. Its 2013 forecast was unchanged at 2 per cent.

Asked about the IMF’s comments on the eurozone, a Downing Street spokesman said: ‘The eurozone still needs to get its house in order. Those issues still exist and no doubt will be a focus of discussions at the coming meeting of the IMF towards the end of the week, which the Chancellor will be attending.’

The IMF said Britain will outperform Germany and France this year – their economies are expected to grow by just 0.6 per cent and 0.5 per cent respectively.

End of the Euro?: The IMF warns that one country leaving the single currency could force its entire collapse

The Italian and Spanish economies are forecast to decline by 1.9 per cent and 1.8 per cent, while a slump of 4.7 per cent is expected in Greece following a 6.9 per cent drop in 2011.

But the report warned that output in the eurozone could fall by 3.5 per cent over the next two years if the debt crisis escalates.

This would knock 2 per cent off the world economy, said the IMF, while a 50 per cent rise in the oil price would lower output by a further 1.25 per cent.

In the absence of such ‘shocks’ the global economy is expected to grow by 3.5 per cent this year, down from 3.9 per cent in 2011, with the U.S., Canada and Japan leading the way in the developed world.