IMF: Euro Zone Recovery Remains ‘Elusive’

European UnionThe “European recession is either over, or almost over,” tweeted Joseph Weisenthal, Executive Editor Of Business Insider following the release of June’s Purchasing Managers Index readings for euro zone countries on Wednesday. The data showed Germany’s private sector recorded its strongest output in five months while output in the French private sector moved closer to stabilization in the beginning of the third quarter.

The French President Francois Hollande has be spouting this same bullish view on the euro zone. During a trip to the Far East in June, he told Japanese business leaders that the crisis in Europe was over.

But there are many reasons why the crisis is far from over. In fact, the International Monetary Fund is still calling for further action to solve the euro zone crisis, and evidence that the bloc’s economy is far from strong is still quite abundant. GDP declined for the sixth consecutive quarter in the first three months of 2013, and the IMF expects economic contraction to continue for the remainder of the year. April saw the highest level of unemployment since the European Union’s inception, and a great majority of citizens of the EU are unsatisfied with the current economic system, which 77 percent believe favors the wealthy.

“Substantial collective actions have addressed important tail risks, and extreme market stresses have subsided,” noted an IMF press release detailing the conclusions of the executive board’s consultation on Euro Area policies. “But the recovery remains elusive.”

There are numerous problems. “Financial markets are still fragmented along national borders, and the cost of borrowing for the private sector is high in the periphery, particularly for smaller enterprises,” the release explained. “Ailing banks continue to hold back the flow of credit. In the face of high private debt and continued uncertainty, households and firms are postponing spending. Needed fiscal consolidation is also weighing on growth.”

The IMF wants EU leaders to make greater progress repairing the balance sheets of their respective countries, so that lending to “small- and medium-size enterprises” can pick up. This will serve to repair monetary transmissions, “preventing a further credit contraction as measures to restore banking system health are being implemented.” Still, even though the IMF’s analysis showed there is great deal of work to be done to bring about recovery, the organization applauded euro zone leaders for their efforts to stabilize financial markets, which have reduced the risk of a break-up of the euro.

Gross domestic product is expected to contract by 0.6 percent this year, but expand by 0.9 percent in 2014.

Because public debt ratios are very high and economic slack is already substantial, the IMF said that “further negative shocks — domestic or external shocks — could severely impact growth.” To limit the effects of “further negative shocks,” the IMF called for more reforms to the banking sector, which included recapitalization of viable banks, and the closure of non-viable financial institutions.

With 12.2 percent of people out of work as of April, unemployment is also a significant problem, and the IMF urged the euro zone to create greater flexibility in its labor market. “Within countries, labour market reforms should continue to remove rigidities, raise participation, and, where necessary, promote more flexible bargaining arrangements,” the IMF said.

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