MercoPress. South Atlantic News Agency

EU deal ‘is part of the solution, but not the solution’ says IMF chief economist

Olivier Blanchard: too much volatility comes from statements

The agreement reached by European countries for deeper economic integration was a step in the right direction but not a complete solution for the Euro zone's debt crisis, International Monetary Fund (IMF) chief economist Olivier Blanchard said.

“I'm actually more optimistic than I was a month ago, I think there has been progress” Blanchard told the Globes business conference in Tel Aviv.

“What happened last week is important: it is part of the solution, but it's not the solution.” He did not say what further steps were needed.

European leaders agreed in Brussels on Friday to draft a new treaty for deeper Euro zone economic integration, although Britain, the region's third-largest economy, refused to join the 17 Euro states and nine other EU countries in the fiscal union.

Asked whether diverse statements from policymakers in Europe were causing volatility in markets, Blanchard said: “A lot of the volatility is coming from statements from Europe, showing the range of opinions and inability to get to a logical decision process.”

EU leaders also agreed Euro zone states and others should provide up to 270 billion dollars in bilateral loans to the IMF to help tackle the crisis, with 150 billion Euros coming from countries in the Euro currency.

“The commitment to give us 200 billion Euros makes a major difference in the sense that we can now go out and talk to other countries and say, 'the Europeans have given us money, can you help?,” Blanchard said.

“Whether this gives us the whole bazooka or not, I hope so.”

Asked whether Britain's decision to isolate itself was right for its economy, he said: “I think that's an issue for the Europeans to decide.”

Adding a tone of scepticism regarding the treaty's chances of success, Jim O'Neill, chairman of Goldman Sachs Asset Management, said the most important thing that happened this week is not “this bungled European deal,” but the release of data that showed a slowing trend of growth in China the world's number two economy.

“The problem in Europe, this isn't really a debt crisis, it's a crisis about the structure of leadership ... Europe needs to organize itself properly and show proper leadership,” he said.

“Everything around the world is being driven by some idiotic statement from some policymaker in the EU.” But he added that now might be the best time in 20 years to invest in Europe, saying, “Never let a good crisis go to waste.”

O'Neill and Blanchard had diverging forecasts for growth in the United States next year.

“I think 2012, in the end, will not be as good as 2011” IMF Blanchard said. “Part of it is that 2011 came out a bit better than expected. I'm not sure this will be repeated.”

O'Neill disagreed, saying he was optimistic on the US economy and thinks growth will exceed 3% this quarter. He added that “corporate America is in an exceptionally competitive position”.