IMF’s Lagarde Warns of ‘Lost Decade’ for Global Economy

International Monetary Fund Managing Director Christine Lagarde has warned that the global economy is at risk of being plunged into a “lost decade” unless nations act together to counter threats to growth.

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“In our increasingly interconnected world, no country or region can go it alone,” Lagarde said in a speech to a forum in Beijing today. “Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand,” she said. “We could run the risk of what some commentators are already calling the lost decade.”

Advanced economies have a “special responsibility” to restore confidence and lift growth, said Lagarde, adding that China should boost consumption and allow its currency to rise. European leaders are looking to China as a potential source of funds for bailout measures necessary to bolster the economies being suffocated by massive sovereign-debt loads.

China and India echoed Lagarde’s call for cooperation in a separate statement, acknowledging that the global economy is in a “critical phase” after the fifth meeting in a so-called financial dialogue between the two nations that is usually held each year. Their comments were dated yesterday and posted on a Chinese government website today.

Asian stocks rose for the first day in three today as easing inflation in China left more room for officials to support economic growth. A government report released on Wednesday showed consumer prices to have risen 5.5% in October, the least in five months.

Lagarde’s comments come just as new fears arise that the European debt crisis, once limited to the single-currency zone’s periphery, may now be spreading to some of the region’s biggest economies. Today Italy’s borrowing costs rose above 7%, the level that drove Greece, Ireland, and Portugal to seek bailouts. The fear is that, if the euro-zone debt crisis spreads, it will have a large impact on the international economy.

The U.S. is also dealing with its own economic slowdown, struggling to boost growth and tackle stubbornly high unemployment. “There are clearly clouds on the horizon,” said Lagarde. “Clouds on the horizon particularly in the advanced economies and particularly so in the European Union and the U.S.”

While the U.S. and euro-zone countries have been struggling with their own issues, Asian economies like that of China have been growing in leaps and bounds. However, Asia is not immune to troubles abroad, and could see its own growth threatened by the collapse of world’s two largest economic regions, and the biggest markets for Asian goods — the U.S. and the euro zone.

Consumer demand for Asian goods has already slowed, and with exports being so vital to countries like China and Japan, that could really hurt growth. “Weakness in the export sector will be the main hindrance to economic growth in the coming quarters,” said Jing Ulrich of JPMorgan.

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Policymakers and analysts have warned that a slowdown in China and other emerging Asian markets, when coupled the troubles of more developed nations, will be detrimental to global growth. Lagarde called upon China to alter its export-led growth policies and boost domestic demand in order to rebalance its economy and sustain long term growth. She also said that Beijing needed to allow its currency to appreciate further in order to boost demand at home.

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