The IMF has just wrapped up its latest half-yearly meeting in Washington. The regular forecasts of economic prospects involved some fancy footwork because of the great uncertainty around Europe. 

Overall, things now look better than they did in January (when the Fund made an interim forecast update) but worse in almost all countries than when the Fund last met, in September 2011. World growth is forecast to be 3.5% this year (0.5% lower than forecast in September and nearly 0.5% lower than occurred in 2011), rising to 4.1% in 2013.

If all goes well, Europe will stagnate, with a slight fall in growth this year and a little growth next year, leaving unemployment at the end of 2013 higher than last year. The US was the only major country to show an upward revision for the 2012 forecast.

This forecast volatility reflects just how much the outlook depends on Europe; a momentary market shiver late last year took 0.75% off the world growth forecast. It is the 'epicentre of potential risk'. In response, the IMF has, in effect, produced two forecasts: the base-line forecast (reported above) assumes Europe sorts things out over the next few years. 'The projections assume that policy makers will prevent another Greek-style downward spiral from taking hold on another economy in the Euro-area periphery'.

Then there are a set of risk profiles, the first of them setting out what might happen in the case of 'financial and sovereign stress' in Europe, involving further fiscal tightening. This would take nearly 2% off world growth over the next two years. Other risk possibilities are also explored, including positive ones. But this is whistling in the dark to keep up morale. The risks are all on the downside.

The outlook is sufficiently grim to motivate Fund members to pledge US$430 billion to supplement the Fund's resources. This backs up Europe's own €700 billion 'firewall', designed to assure Spanish and Italian bond-holders that their money is safe. Australia is offering US$7 billion. America is not contributing, seeing this as a European problem.

The commentary from the meeting wove a similarly subtle path through the policy morass that faces Europe, emphasising how the extra money would help. The Chairman of the Fund's policy-making body accepted that the pledged funds and the firewall are just palliatives which might buy time and might sustain market confidence but which don't address the basic problems of budget deficits, excessive government debt and loss of international competitiveness. 

The main emphasis must remain on fiscal and structural reforms to put economies on a firmer footing. While getting budgets and debt under control was important, it was equally important to spur growth and get it back to normal levels within 2–3 years. Without growth, fiscal sustainability was not possible.

Easy enough to say, but hard – perhaps impossible -- to achieve. Fixing the government debt problem requires austerity, and austerity is inimical to growth. Low growth makes the budget problem worse. Membership of the euro makes external competitiveness hard to restore. Leaving the euro would be chaotic. The IMF commentary offered no solutions to these conundrums.

Photo by Flickr user thetejon.