The euro-zone debt crisis is spreading to core countries and financial markets, and economic growth is headed for a slowdown, according to an International Monetary Fund report released Wednesday.
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The IMF projects that growth for all of Europe will slow from 2.3% in 2011 to 1.8% in 2012, while inflation is expected to decline from 4.2% in 2011 to 3.1% in 2012. Furthermore, those “projections are predicated on the assumption that strong action is taken to contain the current crisis,” according to this morning’s report.
“While many important steps have been taken by the European leaders, it is now necessary to deploy quickly the new crisis management tools agreed upon at the July 21 European Summit and come together around a cooperative plan to deal with the various components of the current crisis. This is much needed to restore confidence of consumers, markets, and investors,” said Antonio Borges, Director of the IMF’s European Department.
“With growth momentum waning and financial tensions rising,” the IMF report calls on European authorities to implement the new institutional architecture agreed upon in July, in particular by taking advantage of the extended flexibility of the European Financial Stability Facility.
The IMF suggests that European leaders “keep monetary policy accommodative or even ease further as risks to growth and financial stability persist and inflationary expectations remain well anchored,” and make a concerted effort to restore confidence in European debt markets by boosting fiscal credibility “based on enhanced European governance and virgorous multilateral surveillance.”
It is necessary to strengthen fiscal positions, though precautions should be taken so as not to further hinder growth, according to the report. Consolidation should be front-loaded in countries where market pressures are most severe, while there is room in other countries, where medium-term fiscal consolidation plans are credible, “to allow automatic stabilizers to work fully to deal with growth surprises.”
Finally, the report urges that action should be taken to restore the ability of the banking sector to finance the economy, in part by boosting capital, using EFSF resources if necessary, as well as boosting liquidity with the help of the European Central Bank.
Throughout its report, the IMF stresses the importance that the euro zone make a “consistent, cohesive, and cooperative approach to monetary union adopted by all euro area stakeholders,” because shocks in one region increasingly affect another, and though their interconnectedness is the reason many now find themselves in less than desirable economic circumstances, it is also their “tight economic and financial linkages” that have benefited all euro-zone nations in the past, and that gives them such remarkable potential for growth.