Updated at: 10/11/2012 12:35 AM
By MALCOLM FOSTER
(AP) TOKYO - The head of the International Monetary Fund on Thursday called for urgent action to tackle Europe’s debt problems and an approaching fiscal crisis in the U.S., warning that the struggling world economy is already falling short of even pessimistic expectations.
IMF chief Christine Lagarde, speaking to reporters as the IMF and World Bank began their annual meetings in Tokyo, praised recent steps taken by the European Central Bank and European governments, but said "more needs to happen, and faster."
Later in the day, finance ministers and central bankers from the Group of Seven richest nations will hold an informal gathering where they will likely discuss steps to address Europe’s debt crisis, weaker growth in Asia and an impending budget impasse in the U.S.
The IMF has scaled back its global growth forecast for 2012 to 3.3 percent from 3.5 percent, and has warned that even its dimmer outlook might prove too optimistic if Europe and the United States fail to resolve their crises.
"We are not expecting a very, very strong recovery. The recovery continues, but it continues more slowly than we had expected earlier this year," said Lagarde. The slowdown is "having a ripple effect on emerging markets, and in particular in Asia."
Lagarde also said two senior Chinese finance officials who cancelled their trip to Tokyo amid a territorial dispute with host Japan will "lose out" by not attending. "Our concern is that they will be missing a great meeting," she said. "We have a lot of substantive issues to discuss."
Diplomatic tensions have flared between the two Asian giants over a cluster of tiny islands in the East China Sea controlled by Japan but also claimed by China. In an apparent sign of Beijing’s anger over the issue, People’s Bank of China Gov. Zhou Xiaochuan, who was scheduled to give the event’s closing speech on Sunday, will not be attending. His deputy will represent him in the meeting and deliver the speech.
Lagarde stressed that economies in Asia are critical to global growth, and hoped that disputes between countries in the region can be resolved for the good of economic cooperation in Asia and the rest of the world.
"We hope that differences, however longstanding, can be resolved harmoniously and expeditiously so that from an economic point of view cooperation can continue ... since we are all very closely interconnected," she said.
Japanese auto sales in China plunged last month, and tens of thousands of Chinese tourists have cancelled trips to Japan, which is depending on China as a source of growth amid the global slowdown. The dispute is also an economic negative for China. Before tensions escalated, China’s economy was already slowing and grew at its slowest rate in three years in the second quarter.
Lagarde praised the recent steps to shore up Europe’s financial system, which has been burdened by high government debt and weak banks in countries such as Greece and Spain, but stressed that more needs to be done.
The ECB has decided to buy unlimited amounts of government bonds to help lower borrowing costs but countries that want to benefit from that measure need to apply to other euro nations for a bailout first.
European governments have also taken steps to reduce budget deficits. A proposal to design a European banking supervision system, however, has run into obstacles, with Germany wanting more time to finalize details before making the ECB the supervisor of banks.
Greece, Ireland and Portugal have already received bailouts from the IMF, European Central Bank and European Union. Spain has worried investors by declining so far to ask for financial aid from the 17 country grouping that uses the euro currency.
"Action has already occurred," Lagarde said. "But more needs to happen and faster.
She also said the U.S. faces major risks in the so-called "fiscal cliff" in 2013, when tax increases and deep spending cuts will take effect unless Congress breaks a budget impasse.
The IMF has urged the U.S. to raise the ceiling on the level of debt the government can issue, which is capped by law. In August 2011, a battle between the Obama administration and Congress over raising the limit wasn’t resolved until the U.S. almost defaulted on its debt.
"Here, too, decisive action is expected," she said.
World Bank President Jim Yong Kim, meanwhile, told reporters that while the annual meeting’s main preoccupation is staving off recession among the world’s most advanced economies, it also needs to lay the foundation for helping developing nations escape poverty.
China and other emerging economies may not need the bank’s financing but they still can benefit from its expertise, Kim said.
Kim has announced his mission is to "bend the arc of history" in ending poverty. That requires effective ways to combat and mitigate climate change, help keep food prices under control and take risks of natural disasters into account in national planning, he says.
"Everyone is vulnerable during times of uncertainty, but especially the poor," he said.
The volatile situation in countries engulfed in the "Arab Spring" protests demonstrates vividly the need for growth that generates jobs, especially for the young and for women. That is all the more crucial in "fragile" states affected by conflict, where disaffected or idle young workers may just pick up arms if they have no better options, Kim said.
"If you have economic growth that is not inclusive you are building instability into your system," he said.
AP Business Writer Elaine Kurtenbach contributed to this report.
(Copyright 2012 by The Associated Press. All Rights Reserved.)