INTERNATTIONAL. The crisis in the euro area has reached a critical stage, the staff of the International Monetary Fund said in its latest assessment, and urged the 17 countries of the eurozone to remain strongly committed to a robust and complete monetary union, including a unified banking system and more fiscal integration.
A strong collective commitment to “a robust and complete monetary union” would help restore faith in its viability, the IMF statement said. It should encompass a credible path to a banking union as an immediate priority, and greater fiscal integration, with better governance and more risk sharing.
Elements of the banking union would include
• a common supervisory and macroprudential framework
• a deposit guarantee scheme, and
• a bank resolution authority.
"The IMF's assessment supports a positive agenda in the short and medium term," IMF Managing Director Christine Lagarde said.
“These steps should be supported by wide-ranging structural reforms throughout the euro area to raise growth, while demand support should be maintained in the short term to cushion the impact of the region’s adjustment efforts,” she added during her participation in the Eurogroup meeting in Luxembourg on June 21.
The annual policy consultations with the euro area are part of regular discussions with all 188 members of the IMF and come at a particularly difficult time for Europe. Within the euro area, the IMF, along with the European Central Bank (ECB) and the European Commission, is providing financial support to Greece, Ireland, and Portugal. It recently was asked to monitor eurozone support for Spain’s financial system.
Determined collective commitment needed
The IMF recognized the importance of the actions that have been taken to contain the crisis, including the ECB’s special liquidity interventions, the larger European and global firewall, the adoption of the Fiscal Compact, and the national governments’ commitment to fiscal consolidation and debt sustainability.
Low growth rates and rising market stress are hindering the reduction in debt levels, the IMF warned, adding that contagion from further escalation of the crisis would have a substantial global impact, especially on neighboring European economies.
Higher and more balanced growth
The IMF said that stronger steps toward a complete monetary union require wide-ranging structural reforms throughout the euro area to raise growth. Such reforms would include
• Reforming job markets to raise labor force participation rates
• Increasing competitiveness in the tradable goods sectors in Southern Europe
• Boosting investment in infrastructure and human capital to support growth and employment
• Reforming product markets to help generate a “more vibrant services sector and raise overall productivity” in Northern Europe.
Substantial competitiveness gaps between countries also need to be addressed. To do so, the IMF called for reforming the service sector, lowering unit labor costs, and fostering relative price adjustment between the North and the South with the help of monetary policy.
Since structural reforms take time to revive growth, support for demand should be maintained in the short term to cushion the impact of the region’s adjustment efforts. The IMF highlighted that the following actions should be taken in the short-term:
• Implementing fiscal consolidation “decisively and credibly” where market pressure is high, but more gradually elsewhere to help support demand in the region.
• Committing to a more accommodative monetary policy for an extended period.
• Recapitalizing weak banks—including through direct support from the European Financial Stability Facility and European Stability Mechanism resources—to address the adverse feedback loop between sovereign and banking stress at the national level.