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IMF urges strong action to restore growth in Europe

Tags: IMF, EFSF, REO
IMF urges strong action to restore growth in Europe

IMF urges strong action to restore growth in Europe

Pictured: Antonia Borges, director of the IMF's European department

In its latest regional economic outlook for Europe, the IMF has projected that European growth will slow from 2.3pc in 2011 to 1.8pc in 2012.

It said, however, that downside risks to growth are significant and that these projections are based on the assumption that strong action is taken to contain the current crisis.

“While many important steps have been taken by the European leaders, it is now necessary to deploy quickly the new crisis management tools agreed upon at the July 21 European Summit and come together around a cooperative plan to deal with the various components of the current crisis,” said Antonio Borges, director of the IMF’s European department. “This is much needed to restore confidence of consumers, markets, and investors”

The Regional Economic Outlook (REO) for Europe: Navigating Stormy Waters report calls for a range of actions and policy adjustments.

It says the new institutional architecture agreed in July by European authorities must be implemented, in particular by taking advantage of the extended flexibility of the European Financial Stability Facility (EFSF).

Monetary policy must be kept accommodative or eased further as risks to growth and financial stability persist and inflationary expectations remain well anchored.

It also recommends caution. “Where market pressures are most severe, the consolidation should continue to be front-loaded. In other countries, where medium-term fiscal consolidation plans are credible or have been front-loaded, there is room to allow automatic stabilizers to work fully to deal with growth surprises.”

The report also calls for “ambitious actions to restore the ability of the banking sector to finance the economy, including measures to bring additional capital to European banks, if necessary using EFSF resources, as well as longer term liquidity facilities from the European Central Bank”.

And it says there must be a concerted effort to restore confidence in European sovereign debt markets, with a particular emphasis on countries that are solvent under normal market conditions.

It notes that an escalation of the strains in euro area debt markets poses risks for emerging European states, given tight economic and financial linkages. “The growing interaction has benefited both regions. However, shocks in one region increasingly affect the other and thus policy plans need to take such spillovers into greater account.”

Looking to medium-term, the report notes that higher growth rates would help address many of Europe’s pressing problems.

“Europe’s growth potential is remarkable. With steady implementation of the right policies, it can be achieved,” Borges said.

Tags: IMF, EFSF, REO