WASHINGTON (Reuters) – Uncertainty over the fate of the euro currency is already dampening U.S. economic growth and any significant worsening of the crisis would deal a blow to a recovery that is gradually gathering steam.

Economists estimate that volatile markets and business uncertainty over the fate of Greece and the policy course in Europe is already shaving anywhere from one tenth to one half a percentage point from U.S. 2012 gross domestic product growth.

In a Reuters poll last week, U.S. GDP was forecast on average at 2.3 percent for 2012 and 2.4 percent for 2013.

The direct hit to growth comes through trade. U.S. exports to the European Union account for 19 percent of total exports, and those to the euro zone represent 13 percent of the total. But when calculated in terms of GDP, the share is tiny – only 1.3 percent of total output.

The indirect effects are another matter. Europe in 2010 accounted for 25 percent of world trade, according to Deutsche Bank. Europe also is the biggest trading partner for China and the United States. Loss of this market would ripple worldwide and slow global growth.

The other indirect impact is through the financial sector.

If Greece were to leave the euro zone, it would raise questions about the survival of monetary union and trigger turmoil in markets. Business investment would stall, banks would pull back on credit, and lost wealth as equity prices fall would cause consumers to slow their spending. Commodity prices would plunge, helping importers but hurting growth in export economies.

WASHINGTON, May 17 (Reuters) – Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy, the former head of the European Central Bank said on Thursday in unveiling a bold proposal to salvage the euro.

The plan offered by Jean-Claude Trichet, who stepped down last November as ECB president, would address a fundamental weakness of the 13-year-old single currency, the survival of which is threatened by the Greek crisis.

The monetary union has always defied economic principles, because the euro was launched ahead of European fiscal or political union. This has caused strains for countries running huge budget deficits – namely Greece, Portugal, Ireland, Spain and Italy – that have led to financing difficulties and over-stretched banking systems.

For the European Union, a fully fledged United States of Europe where nation states cede a large chunk of fiscal authority to the federal government appears politically unpalatable, Trichet said.

An alternative is to activate the EU federal powers only in exceptional circumstances when a country’s budgetary policies threaten the broader monetary union, he said.

“Federation by exception seems to me not only necessary to make sure we have a solid Economic and Monetary Union, but it might also fit with the very nature of Europe in the long run. I don’t think we will have a big (centralized) EU budget,” Trichet said in a speech before the Peterson Institute of International Economics here.

“It is a quantum leap of governance, which I trust is necessary for the next step of European integration,” he said.

WASHINGTON (Reuters) – Greece ditching the euro, huge tax hikes and spending cuts in the United States in 2013, plus a showdown over Iran’s nuclear ambitions are three big political risks looming over a global economic recovery that looks more uncertain by the day.

The global outlook clouded late last week. The European Commission downgraded growth forecasts for Spain and Greece; China reported weak retail sales, bank lending and industrial output; and India’s industrial output slumped for the first time in five months.

The U.S. economy already has hit a soft patch. Its giant service sector is slowing and employment growth has cooled. While U.S. manufacturing is holding firm, weakness in Asia and Europe makes it vulnerable to loss of export markets.

One bright spot for the global economy is oil. If high-level meetings this week with Iran succeed in defusing nuclear tensions, growth could get a major fillip from lower oil prices.

Brent crude prices already have fallen by 9 percent since early March, and the Institute of International Finance estimates they could retreat a further 14 percent to 18 percent if the political risk premium from Iran was squeezed out.

Relief from political risks stemming from the United States, however, will take much longer. Resolving U.S. budget battles, which threaten to thrust the nation back into recession next year if planned tax increases and budget cuts go through, must await the November presidential and congressional elections.

That leaves Europe as the immediate wild card in the deck.

WASHINGTON, May 13 (Reuters) – Greece ditching the euro, huge tax hikes and spending cuts in the United States in 2013, plus a showdown over Iran’s nuclear ambitions are three big political risks looming over a global economic recovery that looks more uncertain by the day.

The global outlook clouded late last week. The European Commission downgraded growth forecasts for Spain and Greece; China reported weak retail sales, bank lending and industrial output; and India’s industrial output slumped for the first time in five months.

The U.S. economy already has hit a soft patch. Its giant service sector is slowing and employment growth has cooled. While U.S. manufacturing is holding firm, weakness in Asia and Europe makes it vulnerable to loss of export markets.

One bright spot for the global economy is oil. If high-level meetings this week with Iran succeed in defusing nuclear tensions, growth could get a major fillip from lower oil prices.

Brent crude prices already have fallen by 9 percent since early March, and the Institute of International Finance estimates they could retreat a further 14 percent to 18 percent if the political risk premium from Iran was squeezed out.

Relief from political risks stemming from the United States, however, will take much longer. Resolving U.S. budget battles, which threaten to thrust the nation back into recession next year if planned tax increases and budget cuts go through, must await the November presidential and congressional elections.

That leaves Europe as the immediate wild card in the deck.

By Stella Dawson and Nick Edwards

(Reuters) – With the United States struggling through a soft patch and Europe battling recession, China may come to the rescue by demonstrating a resilience that would provide comfort in a sea of economic uncertainty.

China, the world’s second largest economy, is looking ever more vital to maintaining global economic momentum, and a raft of data to be released this week is expected to provide fresh evidence that its economy bottomed in the first quarter and is starting a gradual turn upwards.

China posted its weakest growth in nearly three years in the first quarter, with gross domestic product expanding 8.1 percent. The slowdown in growth coincided with deteriorating economies in the euro zone and the United States, China’s two largest trading partners.

That combination stoked concern that China, too, could weaken, frustrating a shift away from export-driven growth toward domestic consumption, which economists view as essential to putting the global economy back on a solid growth path.

China’s growth has from China is even more important after mixed data from the United States in recent weeks, highlighted by a disappointing jobs report for April. Job growth slowed to 115,000, the third straight month of deceleration.

In Europe, business activity took a turn for the worse last month and the elections in France and Greece and Spain’s struggles to resolve its banking problems have driven up political uncertainty over the direction of the euro zone.

WASHINGTON (Reuters) – The amount of money thrown at rescuing the world economy since the Great Recession began is truly staggering, probably more than $14 trillion, and the financial spigots are still open.

Industrialized and emerging nations pledged another $430 billion to boost the International Monetary Fund’s lending power this weekend, doubling the size of its crisis-fighting war chest in case Europe’s problems worsen and engulf more countries.

Three weeks earlier, European Union leaders set aside $1 trillion for Europe’s bailout fund creating a firewall to prevent the euro zone’s sovereign debt woes from spreading.

Major central banks haven’t finished pumping money into the global economy either.

The Federal Reserve meets on Tuesday and Wednesday and the Bank of Japan meets on Friday, and their bias toward monetary easing through bond purchases is likely to remain firmly in place. Japan may even ease again to counter deflationary pressures.

The IMF has recommended more action from the European Central Bank, and the People’s Bank of China is seen cutting its bank reserve requirements this year to underpin growth.

But can all this money restore growth to robust levels anytime soon?

WASHINGTON (Reuters) – The worst of Portugal’s economic downturn could be over, though conditions remain challenging, Finance Minister Vitor Gaspar said on Saturday.

Portugal is in its worst recession since the 1970s, with unemployment in double digits and its government locked out of financial markets. It has received a 78 billion euro bailout, and the government expects the economy to contract by 3.3 percent slump this year, swinging to meager growth of 0.3 percent in 2013.

“If you look at conjunctural indicators, the latest available indicators suggest the pace of decline may have eased during or towards the end of the first quarter,” Gaspar said in an interview.

“We are on track” to achieve Lisbon’s economic forecasts, he said. “Or let me put it another way, the evidence we see is not inconsistent with being on track, which is more cautious.”

Such a path would be a relief to financial markets, with some investors concerned that Portugal will go the way of Greece and need additional bailout money. Yields on its 10-year sovereign debt shot above 17 percent in late January but now are trading around 11.69 percent.

Gaspar ticked off a series of encouraging signs: tax collections are “unimpaired” despite the downturn, the current account deficit is narrowing, and bank credit remains available even as bank deleveraging progresses.

“Adjustment in some dimensions is progressing much faster,” he said.

WASHINGTON (Reuters) – International Monetary Fund chief Christine Lagarde said on Thursday she expects to win a big boost in funding to help the lender contain damage from the euro-zone debt crisis now that Europe has taken significant steps on its own.

Calling the euro zone the “epicenter of potential risk” for a world economic recovery that is “timid and fragile,” Lagarde also urged European Union policymakers to directly inject some bailout funds into their troubled banks.

“We expect our firepower to be significantly increased as an outcome of this meeting,” she said at a news conference to kick off the spring meetings of the IMF and World Bank.

The IMF wants to secure at least $400 billion in new funding, which would double its firepower to deal with the euro zone debt crisis and any spillover to other countries. The IMF firewall would complement the $1 trillion in emergency funds for Europe agreed upon by the EU leaders last month.

A larger IMF war chest to safeguard countries could help ease concerns in financial markets over the risks of global contagion. Investors are growing increasingly worried that Italy and Spain will fail to ratchet down their budget deficits as their economies shrink, forcing them to join Greece, Ireland and Portugal as bailout recipients, a prospect that weighed on global stocks on Thursday.

Concerns also are mounting about the resiliency of the European banking system. The IMF estimates its banks must shrink assets by $2.6 trillion over the next two years to meet higher capital standards and cover bad loans, causing credit to contract in an already weak economy.

Spain’s banks are particularly vulnerable, hit by a plunging property market and the falling value of Spanish government debt. An auction on Thursday highlighted nervousness over Madrid’s finances. Although bidding was solid, the government paid an uncomfortable 5.74 percent on its new 10-year bond.

WASHINGTON (Reuters) – Euro zone policymakers must lay out a clear path toward fiscal union and supervise their banks centrally if they are to restore market confidence in monetary union and achieve lasting financial stability, the International Monetary Fund said on Wednesday.

Although the European Union and the European Central Bank have taken major steps that have eased tensions in financial markets over euro-zone sovereign debt problems, they need to break the vicious cycle of market attacks, the IMF said in its Global Financial Stability report.

“European authorities need to provide investors with a clear vision of where monetary union is going, because the answer to this is more and better Europe, not less Europe,” said Jose Vinals, IMF financial counsellor in releasing the report.

“None of these policies are easy and some are politically difficult. But I believe they are within reach. Let’s not miss the opportunity,” Vinals said.

Risks to global financial stability remain elevated and have not abated over the past six months, due to festering problems in Europe and its banking system, the IMF said.

The IMF estimated that bank deleveraging will cause European bank assets to shrink by $2.6 trillion over two years, squeezing credit availability. Italy, Spain and other periphery economies in the euro zone will be especially hard hit and emerging Europe will suffer too, Vinals said.

If economic conditions worsen, EU banks could shed an additional $1.2 trillion in assets by the end of 2013, causing credit to contract by a further 4.4 percent and GDP to decline by 1.4 percent, it said in recommending that the EU help recapitalize banks.