Europe needs to strengthen its financial rescue fund to reduce the risk of renewed global instability as U.S. tax cuts and buoyant emerging economies help propel the recovery elsewhere, the IMF said on Tuesday.
Rich nations should nurture their slower growth rates by keeping monetary policy loose, while inflation pressures may force a number of emerging economies to raise borrowing costs, and global growth engine China should look to revalue its yuan currency sooner rather than later, it said.
In an updated World Economic Outlook, the International Monetary Fund said the global economy would likely expand 4.4% this year, a touch higher than the 4.2% forecast in October. It expects growth of 4.5% in 2012.
But, in an update to its Global Financial Stability Report, the Fund said the effective size of Europe's financial rescue fund should be increased and that its banks needed rigorous stress-testing to help restore market confidence.
The worry is that the European Financial Stability Facility, which has a headline value of 440 billion euros but an effective lending capacity of around half that, could be wiped out if a larger European economy needed rescuing.
There have been E.U. discussions on beefing up the fund so it can lend the full amount, but there has been resistance from Germany, which says it must be part of a wider set of measures expected in March.
The IMF said Europe's banks needed further stress-testing -- as scheduled by the region's policymakers -- to ensure they could withstand any future shock. Non-viable banks should be closed, it said.
The link between weak balance sheets of European banks and governments was a primary reason why the International Monetary Fund said global financial stability was still at risk nearly four years after the financial crisis struck.
The Fund forecast a lift to a global economic recovery which began to gain pace in 2010 from a package of U.S. tax cuts enacted late last year. It said a separate stimulus package in Japan would also help.
Advanced economies have been a drag on global growth since the financial crisis erupted and the IMF said they still posed the biggest risk to recovery.
It also kept pressure on Beijing to allow the yuan to strengthen, in contrast to French President Nicolas Sarkozy saying on Monday it was not his job to tell China what to do with its currency.
It raised its 2011 growth projection for advanced economies to 2.5%, but warned the pace was not sufficient to make a dent in high unemployment. It said rich nations needed to keep loose monetary policies to bolster growth.
The Fund forecast U.S. growth of 3% this year, a sharp increase from 2.3% forecast in October for the world's largest economy.
It was less positive on other advanced economies -- keeping its euro zone forecast at 1.5% and raising Japan slightly to 1.6% -- but saw growth accelerating somewhat in 2012.
Emerging and developing economies, which include China, India, Brazil and Russia, were expected to keep up brisk growth, although the Fund noted inflation pressures rising, particularly from high food and energy prices.
