IMF: How can Eurozone avoid stagnation

(L-R) International Monetary Fund Managing Director Christine Lagarde, IMF First Deputy Managing Director David Lipton, and IMF Deputy Managing Director Naoyuki Shinohara at IMF Headquarters on April 21, 2013 during the 2013 IMF/World Bank Spring Meetings in Washington, D.C. (IMF Staff Photo/Michael Spilotro).

(L-R) International Monetary Fund Managing Director Christine Lagarde, IMF First Deputy Managing Director David Lipton, and IMF Deputy Managing Director Naoyuki Shinohara at IMF Headquarters on April 21, 2013 during the 2013 IMF/World Bank Spring Meetings in Washington, D.C. (IMF Staff Photo/Michael Spilotro).

The International Monetary Fund in its World Economic Outlook (WEO) report published this week states that while drafting it, the Fund’s economists were forced to create a new category of economic recovery or rather stagnation, to include in it only the euro area. In the preface, the Fund economists state plainly that “what was until now a two-speed recovery, strong in emerging market and developing economies but weaker in advanced economies, is becoming a three-speed recovery”.

Eurozone alone in a category of stagnation

Emerging markets and developing economies are still going strong, so the Fund’s economists had to note that “in advanced economies, there appears to be a growing bifurcation between the United States on one hand and the euro area on the other. Growth in the United States is forecast to be 1.9 percent in 2013 and 3.0 percent in 2014. In contrast, growth in the euro area is forecast to be –0.3 percent in 2013 and 1.1 percent in 2014…The forecast for negative growth in the euro area reflects not only weakness in the periphery but also some weakness in the core. Germany’s growth is strengthening but is still forecast to be less than 1 percent in 2013”.

IMF’s criticism of Eurozone continues as it follows: “France’s growth is forecast to be negative in 2013, reflecting a combination of fiscal consolidation, poor export performance, and low confidence. This may call into question the ability of the core to help the periphery, if and when needed. Most euro area periphery countries, notably Italy and Spain, are expected to have substantial contractions in 2013”.

It’s not the first time that the IMF criticises Eurozone for the sluggish economic recovery, at a time when the rest of the world has already left behind the crisis years. It is more interesting to observe however that the IMF not only criticises Eurozone’s poor economic performance, but now it has formulated a policy package for the euro area’s return to economic growth. It’s not a small thing for an economic entity of Eurozone’s weight to accept such detailed policy advises. Still the IMF officials didn’t hesitate issuing long ‘growth recipes’ for use by the euro area officials.

The recipe

During the past weekend at the spring conference of the IMF and the World Bank, the Fund’s official avoided to criticise Eurozone’s representatives being present there, and of course didn’t address any public criticism to the German Federal minister of Finance Dr Wolfgang Schäuble. Actually Germany was congratulated on this occasion for its internal fiscal consolidation expected to lead this year to a surplus of 0.3% of the GDP. This being a unique positive result in government budget administration all across the entire Eurozone of the 17 member states.

IMF First Deputy Managing Director David Lipton, the number two of the Fund, however, when in London last Thursday to participate in the “Bellwether Europe 2013” conference didn’t chew his words and plainly asked Eurozone to do more towards growth. He also didn’t miss the opportunity to criticise the British hostility against the euro, by saying that, “I have been asked to speak today to the topic of “Saving the Euro.” On reflection, that topic might have been more suitable a year ago, before the euro area governments and institutions took important steps that gave us some distance from that worst-case scenario”. Incidentally this “Saving the Euro” conference was organised by The Economist weekly, a firm opponent of Eurozone’s. The title of this conference was also criticised by Jörg Asmussen, Member of the Executive Board of the ECB, who was also speaking there.

A full programme

Let’s go back however to what Lipton had to propose for Eurozone’s return to growth. “The risk of stagnation is not remote in the face of weak growth, fragmented markets, impaired balance sheets, and half-completed reforms,” he said. Then Lipton passed to details. He actually put together an entire growth package for Eurozone as it follows here below.

“To avoid stagnation, Europe needs to act on several fronts. Countries will need to have clear and specific commitments to medium-term fiscal consolidation, with the appropriate pace to be evaluated on a case-by-case basis. Careful consideration should also be given to the composition of fiscal measures. The European Central Bank (ECB) should maintain its very accommodative stance, he said, but noted that eliminating financial fragmentation – whereby households and companies in some countries face clogged credit channels and lending rates well above those in the core – will probably require the ECB to implement some “additional unconventional measures.”

Action on the Banking Union will also be essential to address financial fragmentation, he said, calling the Single Supervisory Mechanism “a key step” and adding that, on the single resolution authority, the IMF supports a market-based bail-in approach as being considered in the European Union Directive on Bank Recovery and Resolution, which would require banks to hold a minimum amount of securities with features that permit them to be written-off or converted to equity if capital buffers fall too low.

“This approach places the primary burden on each institution and its creditors rather than its country, and could defuse some of the political tension on this subject,” the number two of IMF added.
It was a full set of advice covering everything. From fiscal consolidation to the handling of the resolution of failing Eurozone banks and ECB’s policies. Lipton didn’t leave anything out.

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