A new growth agenda is imperative, the IMF has warned in a series of expert reports on the eurozone that held out little hope of a recovery in the near future but called for a slowing of austerity measures where possible.
It also said some periphery countries needed to make adjustments of between 5% and 15% to regain competitiveness, adding that the euro was over valued in deficit countries at the moment.
The steps being taken to force down government deficits are holding back growth, the Washington-based body said, advising the pace of consolidation be moderated where possible but insisting structural reforms be completed.
They once again reduced their growth forecasts for the eurozone, expecting a contraction of 0.6% for a second consecutive year this year and a modest expansion by 0.9% next year.
Public debt is very high and rising, leaving little room to invest in growth-generating policies, despite record levels of unemployment especially among the young, and this, the report warns, poses a danger to political support for reforms, and to the future of the euro itself.
It warned that any sneeze across the Atlantic in the US, for instance related to fears of early exit from monetary easing there, could aggravate and complicate the situation further. This would be further exacerbated by eurozone countries failing to take the reforms they have committed to. “Over the medium term, there is a high risk of stagnation, especially in the periphery,” the report warns.
And despite all the work on separating the fate of banks from their sovereigns over the past four years, the links remain, it says.
The reports, following meetings with eurozone principles, urged them to take more collective action, praising some of the moves made and saying that it addressed important tail risks and that extreme stresses have subsided. The ECB’s outright monetary transactions was praised. It has not yet been used although Ireland would hope to if needed to help with existing the programme.
The IMF directors report saw further ECB action, including policy rate cuts, being needed if conditions worsened substantially and called for further unconventional support especially targeting SMEs.
It urged the eurozone to complete the framework to create the banking union and supported a strong, centralised single resolution authority. It noted with concern that the proposal based on a network of national authorities was weaker. Germany, among others, insists EU treaty change would be needed to create a single authority which would slow down the whole process, the IMF notes.
While the report said that the increase in exports and cuts in government deficits have boosted confidence in the long-term viability of the monetary union, the reports stopped well short of saying that its future was assured.
The effect of the crisis and the actions taken to deal with it had left a financial sector fragmented along national borders, however, with differentiated borrowing costs, higher among the cash-strapped periphery, and especially affecting the smaller enterprises, normally the creator of jobs and growth.
A credible assessment of bank asset quality was essential to restore confidence in the eurozone banking system and it urged continuing assessments, preferably carried by private outside bodies.
It noted that there was little sign of domestic spending picking up to help jumpstart economies as householders dealt with high private debt and uncertainty continued, and it noted that the ongoing fiscal consolidation was also weighing on growth.
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