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World economy risks breaking up into geopolitical blocs, warns IMF chief economist

The Russian invasion has provoked a “tectonic shift” warns Pierre-Olivier Gourinchas, the IMF’s new chief economist. The creation of distinct “geopolitical blocks” could redesign globalization.

The Russian invasion of Ukraine caused a “tectonic shift” in the global order that could lead “to a greater permanent fragmentation of the world economy into geopolitical blocks with different technological standards and different cross-border payment systems and reserve currencies”, warns academic Pierre- Olivier Gourinchas who replaced Gita Gopinath as chief economist at the International Monetary Fund (IMF).

Gourinchas explains: “These risks and policies interact in a complex way and at different times. Rising interest rates and the need to protect vulnerable populations from rising energy prices make it even more difficult to maintain fiscal sustainability. In turn, the erosion of fiscal space makes it more difficult to invest in the climate transition, while delays in dealing with this crisis make economies more vulnerable to commodity price shocks, which in turn fuels inflation. and economic instability”.

This tangle of trends is now joined by geopolitical fragmentation, says the IMF’s chief economist, which “only worsens the choice between all these options, increasing the risk of conflict and economic volatility and decreasing overall efficiency”. . Precisely about the “tectonic change”, this Wednesday, Kristalina Georgieva, the organization’s director-general, asked herself, in a face-to-face with David Malpass, president of the World Bank: “What will the world be like if the economy world break?” To counter a scenario difficult to imagine, the Bulgarian said: “Prosperity and peace are indivisible”.

The IMF’s chief economist, therefore, advises that central banks communicate “well” their decisions when raising policy rates or reducing the value of their own assets, always relying on “data”, and that governments a good balance between “supporting the vulnerable” and rebuilding financial cushions in a context of higher interest rates”.

The rise in geopolitical risk (with an invasion of a neighbor on the doorstep of the European Union and NATO) has “considerably increased far beyond the usual” level of uncertainty, concludes Gourinchas.

Source: With Agencies

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