IMF Survey: Recovery Continues But Crisis Risk Remains, Says IMF

June 21, 2011

  • Broadly sound recovery under way in euro area
  • Sovereign debt crisis remains a risk
  • Further steps needed to strengthen economic governance in euro area

Europe’s economic recovery is broadly sound, but the sovereign debt crisis in parts of the euro area needs to be tackled before it causes trouble in the heart of Europe and spills over to the rest of the world, the IMF says in its latest assessment of the region’s future.

Recovery Continues But Crisis Risk Remains, Says IMF

Only a cohesive and cooperative approach to crisis management in the euro area is seen as successful, says IMF (photo: AFP)


An IMF team, led by Acting Managing Director John Lipsky, met with the leaders of the Eurogroup to discuss the economic outlook for the euro area as part of the IMF’s annual assessment of the region’s economy.

“The recovery is broadly sound, but the sovereign crisis in the periphery remains a risk and will require continued action and attention to avoid it causing trouble in the core and spilling over to the rest of the world.” Lipsky told the 17 finance ministers of the euro area on June 20.

“Regardless of the crisis in the periphery, the ongoing efforts to secure a dynamic and resilient monetary union remain relevant and should be further strengthened,” he added.

The IMF expects the euro area as a whole to grow by 2.0 percent this year, and by 1.7 percent in 2012. The recovery, driven by exports and recovering domestic demand, is being led by Germany and other Northern European countries in the core of the euro area.

Framework for analysis

The IMF’s consultation with the leadership of the euro area this year also included two other dimensions: an in-depth analysis of the European Union’s financial stability framework known as the “European Financial Stability Framework Exercise,” and a report on the impact of the euro area and its policies on the global economy.

This spillover analysis is part of a larger IMF effort to assess the global impact of the policies of the five largest economies in the world—China, the euro area, Japan, the United Kingdom, and the United States. The U.K. mission was the first to include the spillover element, followed by Japan on June 7-8, and China on June 9. The consultation with the United States is slated for June 27.

Sovereign debt crisis still unresolved

The crisis in the Europe’s periphery has brought the euro area to a crossroads. The management of the ongoing sovereign debt problems in several countries is a key element in this. “Only a cohesive and cooperative approach to crisis management will be successful,” Lipsky said.

The most acute problems are in Greece, where the government is trying to secure domestic political backing for a strengthened package of measures to put its economy on a more secure footing. The country will also need additional financing to help it overcome the crisis.

“Given the difficult financing circumstances, Greece is unlikely to regain private market access by early 2012,” the euro area finance ministers said June 20 in a statement. The 17 ministers said they agreed that the required additional funding will be financed through both official and private sources.

The IMF has said that “We stand ready to continue our support for Greece subject to adoption of the economic policy reforms agreed with the Greek authorities. Progress continues to be made in discussions to ensure the full financing of the program. Conclusion of the pending program review remains subject to approval of the IMF’s Executive Board.”

The goal is to define the main parameters of a clear new financing strategy in early July, the statement from the Eurogroup said. Ministers also urged all political parties in Greece to support the program.

Strengthening the recovery

Even if the crisis in the periphery is successfully contained, policymakers in the euro area will need to address a broad policy agenda to boost growth and improve the resilience of the monetary union.

“If the euro area is to be more stable and resilient and live up to its growth potential, it will have to press ahead with a broad reform agenda now. Many welcome initiatives are under way, but in our view in nearly all areas a few crucial additional steps are needed to make them add up to a consistent set up,” Lipsky said.

In its assessment, the IMF emphasized the need to:

•Continue fiscal consolidation broadly as planned to support confidence. Given market pressures, the positive effects on confidence from fiscal adjustment could be sizable. Fiscal consolidation is under way, but faster growing economies should seek to reach their deficit reduction targets earlier than planned. Crisis countries will have to continue consolidation.

•Build a stronger banking system. The European banking model is traditionally one of high leverage, and capital positions have to be fundamentally strengthened. Upcoming European-wide stress tests provide an opportunity to do so in a timely manner, which is especially relevant in the context of the current crisis.

•Take further steps toward economic and financial integration. Policymakers have focused on national priorities, but the key to success is the strength of the economic union. This calls for the completion of the single market to boost both growth and stability. The integration of labor, goods, and services markets must continue, but progress is particularly important in the area of capital.

•Build a stronger framework for economic governance. Stronger governance of the euro area is indispensable to foster confidence in the resilience of the euro area. To improve fiscal discipline and structural policies, the efforts under way to strengthen the Stability and Growth Pact’s preventive and corrective arms, upgrade national budget processes, and introduce a binding Excessive Imbalances Procedure should continue.

Europe’s impact on the rest of the world

The IMF’s in-depth analysis of the outward spillovers from the five largest economies in the world is a natural continuation of its efforts to support international policy collaboration aimed at reducing global economic imbalances that threaten the recovery. In the case of euro area, the analysis focused on the effect of the sovereign debt crisis on the rest of the world economy.

“Our analysis suggests that the spillovers from the ongoing difficulties in the periphery are relatively small. But it also shows that the crisis would be felt much more strongly around the world if it spread to the banks in the core of the euro area,” Lipsky said.

“This entails an important message. It implies that success in managing the current crisis, deepening integration, and improving governance will benefit not only the euro area but also the global economy,” he added.

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