posted 09-19-2003 01:07 PM            

Charlotte Denny and Larry Elliott
Friday September 19, 2003
The Guardian

The International Monetary Fund yesterday warned that the colossal United States trade deficit was a noose around the neck of the economy, emphasising that the once mighty dollar could collapse at any moment.

Arguing that the world's big economies were already too dependent on the willingness of American consumers to live beyond their means, the IMF said the US could not continue to run a current account deficit of 5% of GDP.

The IMF's chief economist Kenneth Rogoff said that it was just a matter of time before the gap closed, tipping the dollar into a potentially steep fall.

"If we were looking at a poor developing country, the world gives them just enough rope to hang themselves. A country like the United States, they give them enough rope to tie the noose around their neck several times. But it does happen in the end," he said.

In its twice yearly report on the world economy, the Fund warns that even a controlled slide in the dollar's value is likely to slow US growth and unless other countries picked up the slack, the global economy would suffer.

Mr Rogoff said the collapse of world trade talks last weekend in Cancun could spell disaster for a global economy already too dependent on unbalanced growth in the US. Describing the breakdown as a "tragedy", he said global poverty would rise if protectionism took root in the world's biggest economies.

Wars in Iraq and Afghanistan and heightened geopolitical tensions worldwide after the September 11 attacks on the US would "unquestionably" hold back growth in the decades ahead, Mr Rogoff told reporters.

The report was highly critical of Europe's stagnating economies, blaming governments for failing to embrace deep structural reforms of their labour markets and welfare states.

"Reforms to improve the competitiveness of European labour and product markets could yield significant dividends in terms of regional output," the report said.

It also warned that an overrigid application of Europe's fiscal rulebook could push the eurozone deeper into trouble.

Chancellor Gordon Brown echoed the IMF's criticisms of the eurozone in an article in yesterday's Wall Street Journal, arguing that the credibility of Europe was at stake.

Demanding wide-ranging change to policies "that have held back our continent for too long", Mr Brown added: "Reform is not just desirable, it is an urgent necessity."

The chancellor said: "Having created a single market in theory, we should make it work in reality - and help it spread competition, cut prices, increase consumer choice and deliver higher productivity."

The impact of the stalled trade talks in Mexico on the fragile global recovery will dominate this weekend's annual meeting of the IMF and the World Bank in Dubai.

Mervyn King, the governor of the Bank of England, said yesterday: "The failure of the talks in Cancun will cast something of a cloud over the meeting.

"That is not a happy background in which to assess the durability of the recovery."

Misalignments between the world's biggest currencies are also likely to feature on the agenda, with the US hoping other countries will support its campaign to get China to strengthen its currency, the yuan.