IMF: oil prices endanger global economy

International Monetary Fund chief Rodrigo Rato says governments need to boost employment in response to signs of social tension

By Laurence Frost

Associated Press Business Writer

IMF chief Rodrigo Rato warned Nov. 4 that high oil prices are endangering the global economy and urged governments to boost employment in response to increasing signs of social tension such as the riots in France.

The world economy has broadly withstood a steady two-year rise in oil prices, the International Monetary Fund managing director said, but price pressures are increasingly driven by supply constraints rather than demand, with “more nasty” economic consequences.

“We are seeing more inflationary pressures across the board and we are seeing also some consequences in consumption, so that means in growth,” Rato said.

The increases have yet to be passed on to consumers in many countries, he added, which means that the full impact on growth and inflation has yet to be felt.

“We see an increase in risks to growth from high oil prices and from global imbalances,” Rato said. “In our opinion those imbalances are becoming unsustainable and pose a serious risk to world prosperity.”

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Oil producing states should increase efficiency and consuming countries build extra refining capacity, Rato said.

Speaking during a trip to Paris, where he was attending a Bank of France meeting, the former Spanish finance minister also warned of growing social tensions in many European countries and urged governments to boost job creation through further labor market liberalization.

Such tensions have been on nightly display on the poor northeastern outskirts of the French capital, with riots and running battles between youths and police that threaten to spread to other towns.

“As you may have noticed, social cohesion is already under pressure in many European countries,” Rato said.

Without commenting specifically on the Paris unrest, he said that “part of the solution to ease those social concerns is to make higher degrees of employment available to European citizens.”

France’s situation represents a “key question for Europe,” Rato said. “If we want to have bigger employment, we need to have more flexibility. And if we want to keep our (current) social system we need to have more employment.”

French unemployment has fallen steadily to 9.8 percent in September, from 10.2 percent in May, but many of the new jobs are the result of new subsidies and other publicly funded incentives.

“To rely exclusively on budget impulses to reduce unemployment is a very limited policy and it has a lot of shortcomings,” Rato said. While welcoming a recent liberalization of labor laws for smaller French companies, he said a recent increase to the minimum wage “has put out of the market a lot of people.”

The IMF is predicting 1.2 percent economic growth for the 12-nation euro zone this year and 1.8 percent in 2006 — compared with steady annual growth of 4.3 percent for the world economy as a whole.