IMF Survey: Eurozone Needs Strategy for Reviving Growth, Says IMF's Shafik
June 4, 2012
- Nominal fiscal targets for 2013 broadly appropriate but should be kept under review in light of growth
- Decisive steps toward more complete financial integration are needed
- Contagion in financial markets risks undermining public support for reform effort
With renewed turbulence in financial markets putting policymakers in the euro area under pressure to agree new measures to stem the crisis in the periphery, the IMF is calling for a concerted strategy to lift growth in Europe.
An effective strategy would be based on macroeconomic policies to support demand in the near term, and further progress in structural reforms to raise long-term growth and complete the process of European integration.
“Overall, fiscal adjustment plans for this year are broadly appropriate in Europe. In a few euro area countries, however, the nominal fiscal targets for 2013 agreed before the current slowdown in growth may prove too procyclical and may need to be adjusted or at least expressed in structural terms,” Deputy Managing Director Nemat Shafik said May 31 at the 2012 Brussels Economic Forum organized by the European Commission.
With price pressures expected to decline, the European Central Bank could also consider further expansionary measures, Shafik said.
Over the medium term, countries will need to reform their labor and product markets and find new ways to encourage investment to raise the growth potential of their economies and improve competitiveness. “Unfortunately, there is no magic bullet to spur growth and job creation. Crisis-hit countries in Europe will only be able to revitalize their economies by selling more goods abroad and creating new jobs in the private sector,” she said.
Shafik at Brussels forum: For Europe’s governments, explaining rationale of reforms to public now more important than ever (photo: Frederic Guerdin/Scorpix)
At the regional level, European leaders should aim to complete the architecture of monetary union. In particular, a banking union that would include a bank-deposit guarantee and a bank resolution framework with adequate common backstops, and common supervision and regulation, would be a welcome step,” she said.
Call for action
Olli Rehn, Vice-President of the European Commission, said that more action was needed if policymakers wanted to avoid a disintegration of the eurozone. “We need both a genuine stability culture in the eurozone and its member states and a much upgraded common capacity to contain financial contagion and reduce the borrowing costs for its members,” he said.
One of the countries currently being affected by contagion through higher spreads on its national debt is Italy, where Prime Minister Mario Monti has introduced a number of reforms in recent months to rein in public spending and revitalize the economy. Speaking via video linkup, Monti urged his European partners to speed up measures to limit contagion from the debt crisis and stimulate economic growth, noting that Italy is being affected “because of the overall weakness of the system, more than for any specific weakness of the country.”
Unless actions were taken to stem such contagion, policymakers risked a backlash from voters everywhere that would undermine the culture of stability that Germany in particular has sought to promote within the European Union, he added.
Finding ways to boost growth
German State Secretary Thomas Steffen cautioned against using stimulus measures and fiscal space to create growth. Testing remaining fiscal space is dangerous, especially in a currency union, he warned. Instead, countries should repair competitiveness through reforms, build a stable legal framework, and strengthen fiscal rules so investors know they will get their money back.
A further deepening of the European Union’s single market for goods and services was seen by many speakers as an important avenue to encourage further growth. Harvard University’s Philippe Aghion called for “smart” state intervention, where fiscal discipline, economic growth, and social justice would come together in a virtuous triangle. Sector-based state aid may work, he said, if priority is given to sectors that are growth enhancing, such as energy. Aghion also suggested that the mandate for EU structural funds could be broadened to support structural reforms in member countries.
Sense of urgency
All speakers seemed to agree on one thing: that time is running out. More action is urgently needed to address the crisis, and the consensus was that the solution must encompass both fiscal consolidation and growth-enhancing structural reforms at the national level, and further measures to strengthen economic and financial integration at the European level.
“All in all, we have made solid but uneven—and seemingly insufficient—progress. The EU’s comprehensive strategy has contained the crisis, but not tamed the crisis, not to speak of overcome it. Yet, the counterfactual scenario, that of defaults and disintegration, would have quite likely led to a terrible depression in Europe and in the world,” Rehn said.
For her part, Shafik warned that reform fatigue was setting in. “Regaining competitiveness is a bit like running a marathon. Many reforms, especially of the structural kind, take time to show results, and it is easy to hit a wall when vested interests resist change. To make it to the finish line, it is crucial that European policymakers keep up momentum.”
For governments, explaining the rationale of reforms to the public is now more important than ever. Losing public support now, at this critical juncture, risks negating the efforts of the past two years, and will set Europe back, she said.