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IMF tells Europe to get its act together or risk undermining world economy as spats underscore EU divisions.
BRUSSELS, Belgium — Hours after the International Monetary Fund appealed to Europe to get its act together or drag down the world economy, European Union countries wrangled Tuesday over calls for a financial transaction tax and an EU banking union in a spat that underscored divisions over their response to the euro zone crisis.
"Risks for a serious global slowdown are alarmingly high," the IMF said Monday in its latest World Economic Outlook. "The crisis in the euro area remains the most obvious threat to the global outlook."
The IMF report made for gloomy reading by revising forecasts down to predict a 0.4 percent contraction of the 17-state euro zone’s economy this year and anemic growth of just 0.2 percent in 2013.
The IMF predicted the Greek economy, the currency bloc’s weakest link, would shrink a further 10 percent over 2012-13 and compound the hardships of the past four years of recession.
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The authorities shut down much of Athens Tuesday ahead of German Chancellor Angela Merkel’s first visit since the crisis began.
Some 7,000 police were deployed amid security fears for the leader whom many Greeks blame for prolonging the crisis by demanding tough austerity measures in return for international bailout funding.
Speaking to reporters, Merkel insisted that Germany wants to be a "good partner" and for Greece to stay in the euro zone, but said the country must rely on its own efforts to set its debt-ridden economy on a sound footing.
"I'm sure you will see light at the end of the tunnel," she said. "I'm convinced that the difficult path will be worth it."
As Merkel huddled with Greek Prime Minister Antonis Samaras, some 25,000 protesters gathered outside parliament, according to police estimates. Some clashed with police, who responded with tear gas and pepper spray.
A handful of demonstrators in Nazi uniforms waved swastika flags.
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Samaras said the Greek people are "bleeding," but that the tough policies would eventually pay off. He said Merkel's visit showed the country is no longer isolated in Europe.
Elsewhere on the continent, a meeting of EU finance ministers in Luxembourg agreed to introduce a new tax on financial transactions designed to raise more funds for government coffers. Greece joined Germany and France in a group of 11 EU countries that supported the measure.
Italy, Spain, Slovakia and Estonia joined at the last moment to give them enough support under EU rules to push ahead with the contentious "Robin Hood" tax.
But opposition from other countries highlighted divisions within the EU.
Britain — home to Europe's biggest banking center in London — along with the Netherlands, Sweden and others warned that the tax will lead to a banking flight from Europe unless similar measures are introduced on a global scale. The United States and other countries have ruled that out.
"The financial transaction tax is a very dangerous tax," Swedish Finance Minister Anders Borg told reporters. "It will have a negative impact on growth."
When Sweden attempted to introduce a similar tax in the 1980s, banks fled to London.
Dutch minister Jan Kees De Jager warned the tax could have "devastating results" for his country’s financial sector.
Supporters counter that the levy would be too small to scare away business, but could raise billions for cash-strapped governments. One proposal envisages a 0.1 percent tax on share and bond trades and 0.01 percent on other transactions.
"This is a stabilizing measure and it would create funds for European safety nets, like the [bank] deposit insurance scheme or the resolution of banks to reduce debt," Austrian Finance Minister Maria Fekter said.
Plans to create a single banking supervisor with powers to guarantee savers' deposits and wind up troubled banks also split the ministers Tuesday, despite the IMF’s appeal for the EU to act quickly to set up such a "banking union."
"National leaders must work toward true economic and monetary union,” the IMF report said. “This requires establishing a banking union ... on the principle that more area-wide insurance must come with more area-wide control. Unless more action is taken soon, recent improvements in financial markets could prove fleeting."
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EU headquarters, backed by several countries, wants the European Central Bank to begin acting as a supervisor for the EU banking sector within months in order to re-establish confidence in the banking sector. "We must do that before the end of this year," French Finance Minister Pierre Moscovici said.
Germany, the Netherlands and others with reservations want more time to study the proposals. A third group including Britain, Sweden, Poland and other EU countries that don't use the euro fear they'll be marginalized because they aren't represented in the ECB.
"We still have a very long road to travel before we have a solution to this question," said Borg, the Swedish minister, who pointed to "severe problems" with the proposal.
Nevertheless, EU officials were confident they could reach a compromise by the end of year.
The focus of euro crisis now moves to Tokyo, where finance ministers from around the world are heading for the IMF's fall meeting this week.
Mindful that the Europeans will face a dusting down for the impact their failure to resolve the debt crisis is having on world growth, the EU's top financial official fired off a preemptive shot.
"We call for a truly balanced discussion on all risks to the global economy, that must include mention of the risks arising from the US fiscal cliff," said EU finance commissioner Olli Rehn. "If not addressed soon, the fiscal cliff in the US has the potential to hurt growth in 2013 and to have significant spillover in the rest of the world, including in Europe."