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calls for "strong
action" to restore growth in Europe
Implementation of comprehensive and bold policy action
will help restore Europe’s recovery, the International Monetary
Fund (IMF) said today in its latest Regional Economic Outlook (REO) for Europe: Navigating Stormy Waters. Growth in Europe has slowed significantly, as a result of global shocks, and of the escalation of the euro area sovereign debt crisis, which has shaken confidence and curbed domestic demand.
The REO projects that growth for all of Europe will slow from 2.3 percent in 2011 to 1.8 percent in 2012. Downside risks to growth are significant. Most importantly, the projections are predicated on the assumption that strong action is taken to contain the current crisis.
“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,” Antonio Borges, Director of the IMF’s European Department, said.
With growth momentum waning and financial tensions rising, the REO calls for
the following actions and policy adjustments:
- Implement the new institutional
architecture agreed in July by European authorities, in particular by taking
advantage of the extended flexibility of the European
Financial Stability Facility (EFSF).
- Keep monetary policy accommodative or
even ease further as risks to growth and financial stability
persist and inflationary expectations remain well anchored.
the deterioration in public finances leaves no option but to
strengthen fiscal positions, the slowdown in growth
calls for caution. Where market pressures
are most severe, the consolidation should continue to be front-loaded. In other
countries, where medium-term fiscal consolidation plans are credible or have
been front-loaded, there is room to allow automatic stabilizers to work fully
to deal with growth surprises.
- Ambitious actions to restore the ability of the
banking sector to finance the economy, including measures to
bring additional capital to European banks,
necessary using EFSF resources, as well as longer term liquidity facilities from
the European Central Bank.
- A concerted effort to restore confidence in European
sovereign debt markets, with a particular emphasis on countries
that are solvent under normal market
- Boost fiscal credibility based on enhanced European governance
and vigorous multilateral surveillance.
An escalation of the strains in euro area debt markets
poses risks for emerging Europe1 given tight economic and financial linkages.
The growing interaction
has benefited both regions. However, shocks in one region increasingly affect
the other and thus policy plans need to take such spillovers into greater
Looking to medium-term, higher growth rates would help address many of Europe’s pressing problems, the report notes. In the past decade, growth rates in GDP per capita have differed markedly among European countries. The REO discusses ways to escape low-growth traps and improve long-term economic performance.
“Europe's growth potential is remarkable. With steady implementation of the right
policies, it can be achieved”, Borges said.
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