IMF gives damning indictment of euro area economic situation

The IMF in it’s annual analysis of the euro area has given a damning indictment of the current economic situation and the failure of EU leaders and the ECB to deal effectively with it, saying the root causes remain un-addressed.

Eurobills where countries pool their debt, should be issued first on a small, short-term basis in exchange for the eurozone having veto powers over national deficits and the receiving country pledging their tax income to repay.

It recommends the eurozone proceeds quickly to create a full banking union and fiscal integration, where governments would more closely align their policies and have central oversight of their budgets.

The report notes that rather than improving, the crisis has deteriorated, especially for the southern and peripheral countries, with growing differences in terms of real euro value, exports, imports, employment and growth. “Investors are withholding funds from member states most in need, moving capital to save havens and driving premiums to new records.”

The real economy has been weak, with growth flat in the first quarter, reinforcing adverse bank-sovereign feedback loops, contributing to a vicious cycle of weak confidence, with budget cuts further dampening demand, increasing unemployment and all adding to budgetary pressures.

“The downward spirals between sovereigns, banks and the real economy are stronger than ever... Contagion from further intensification of the crisis would be sizeable globally. And spillovers to neighbouring EU economies would be particularly large. A more determined and forceful collective response is needed”.

It emphasises the role the European Central Bank must play in preventing the situation getting worse and pulling the eurozone off the cliff edge including using policies it has so far absolutely rejected, such as full quantitive easing, more buying of sovereign bonds, further liquidity provision and suggests it further lower its rates from the current 0.75%.

A banking union would combine a pan-European deposit guarantee scheme, a bank resolution mechanism and common supervision focusing first on cross border and large systemically important institutions but later on the entire banking system.

As a half way stage the EFSF/ESM — the EU’s rescue funds — could provide financing for the deposit insurance and resolution frameworks, combined with Commission draft legislation to bail-in unsecured creditors. The ECB could act as the common supervisor.