IMF says Europe needs crucial reforms to grow

25th April 2013, Comments 0 comments

Europe must implement "crucial reforms" to overcome the eurozone debt crisis, generate economic growth and avoid stagnation, the International Monetary Fund warned Thursday.

IMF First Deputy Managing Director David Lipton, speaking in central London, also praised "important steps" taken by eurozone governments to combat the region's long-running crisis.

However he added that there are "crucial reforms that Europe still needs to adopt if it is to place the crisis in the rearview mirror and finally return to growth and job creation. That process is by no means assured, but it is attainable."

Lipton noted that the IMF's baseline scenario saw a continued recession in the 17-nation euro area this year, before a return to modest growth of about 1.0 percent in 2014, but warned that risks remained.

Europe lags behind the United States in a "three-speed" recovery that is spear-headed by emerging and developing nations.

"There is ... a risk that Europe could fall into stagnation, which would have very serious implications for households, companies, banks, and other bedrock institutions," Lipton said.

"So, to decisively avoid that dangerous downside, policy makers must act now to strengthen the prospects for growth."

His comments came on the same day that official data showed that Spanish unemployment had soared to a record high level of 27.16 percent as a deep recession ravaged the eurozone's fourth-largest economy.

Lipton said that European countries needed to ensure the sustainability of their public finances, and also make their fiscal policy "growth-friendly".

Some nations, particularly in southern Europe, needed to introduce labour and product market reforms to boost their medium-term growth prospects, the IMF official said.

Lipton also argued that there was room for even more monetary policy easing from the European Central Bank (ECB), which has held its key interest rate at a record low 0.75 percent since July 2012.

"The ECB has pursued a very accommodative conventional stance, which should certainly be maintained. There is still a bit of room for further easing, especially given subdued inflationary pressures," he said.

The ECB might also have to implement more unconventional measures, he added, given that the European monetary union has become fragmented, with households and companies in some countries having to pay lending rates well above those in other countries, and in light of the economy's lack of response to traditional ECB measures.

"The ECB has taken extraordinary action to protect monetary union," Lipton acknowledged.

"Unfortunately, fragmentation continues and remains debilitating. No one has a quick and simple recipe for eliminating fragmentation, but it will probably require additional unconventional measures from the ECB and action on banking union," he forecast.

"The fact is that there is much that can be done now to ensure that stagnation is not in Europe's future," he concluded.

© 2013 AFP

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