IMF sees ‘stagnation’ risk for EU, presses policy action
The International Monetary Fund on Tuesday cut its eurozone 2013
growth forecast to minus 0.3 percent from minus 0.2 percent but upgraded
next year to 1.1 percent from 1.0 percent as the debt crisis eases.
The outlook, however, remains subdued, it said. In its latest World
Economic Outlook report, the IMF said the scenario for the 17-state
eurozone is now one of “diminished crisis risks amid prolonged
stagnation,” slightly better than its January judgement that “the return
to recovery after a protracted contraction is delayed.”
The downgrade for 2013, compared with revised figures given in a
January update, reflects weaker eurozone periphery countries dragging
down their stronger peers, it said. The fallout from the just-concluded
Cyprus bailout could still cause more problems, it added.
In the past six months, “acute crisis risks in the euro area have
diminished,” the IMF said, highlighting as a major factor the European
Central Bank’s commitment last year to step into the market and lower
borrowing costs for any struggling eurozone member adhering to a
recovery plan.
In addition, completion of the new eurozone rescue backstop, the
European Stability Mechanism, a late 2012 deal on aid payments to Greece
and setting up a Single Supervisory Mechanism (SSM) for banks “have
increased confidence in the viability of” the single currency bloc.
Combined with progress in stabilising strained public finances, the IMF
said this “has greatly improved financial conditions for sovereigns and
banks,” the deadly nexus of the debt crisis which the ESM is supposed to
address by providing fresh capital for lenders.
The IMF noted however that lower borrowing costs and improved bank
liquidity still had not yet produced “improved private sector borrowing
conditions or stronger economic activity.” Worse still, inconclusive
elections in heavily-indebted Italy and the problematic Cyprus bailout,
which spooked small bank savers, made progress “even more challenging
given that financial conditions remain highly vulnerable to shifts in
market sentiment.” Eurozone credit overall has continued to contract,
the IMF said, cutting the lifeblood for business as governments
committed to austerity face growing political calls to put the focus on
growth and jobs as unemployment soars to record highs.
“The need to repair public and private balance sheets, as well as
continued policy uncertainty, appears to be weighing against a robust
recovery in investment and consumption in both the periphery and the
core,” the IMF said.
The report said the eurozone faced a medium-term risk of prolonged
stagnation, with growth around 1.0 percent, which would make it more
difficult to resolve the debt crisis. A positive development would be if
eurozone policy makers build on the SSM, the first step towards a
banking union, by adding a deposit guarantee system and a key resolution
facility which would step in and close down failing lenders in an
orderly way so as to limit their impact on the economy.
AFP |
