IMF Tells Draghi to Cut Rates
The International Monetary Fund issued its assessment of the eurozone Thursday morning and concluded that, although leaders have done a lot to fight the continent-wide recession, more could be done to boost growth and unemployment.
The region, which together is the largest economy in the world, has been trapped in a recession caused by governments slashing budgets in a race for austerity. The move has seen public sectors contract, leading broad economic contraction and massive increases in unemployment across the currency zone.
Increased Stagnation Risks
"Directors observed, however, that despite the policy actions on many fronts, growth remains elusive and high unemployment persists, especially among youth," noted the IMF in its summary of the assessment. "At the same time, household and corporate indebtedness remains elevated in a number of countries, holding back domestic demand. Given narrowing policy space and still fragile and fragmented banking sectors, these developments have increased the risks of stagnation, social and political tensions, and spillovers to the global economy."
The news comes despite some improving signs from some countries across the eurozone. Germany has been the bright spot in a weak eurozone economy while the economies of France, Italy, and Spain appear to be turning a corner.
The IMF also urged eurozone leaders to to do more to stimulate the economy. "Directors generally considered that, given weak growth and subdued inflation, further monetary support, including through policy rate cuts by the ECB, would likely be necessary, especially if conditions worsen substantially. Directors also saw a role for explicit forward guidance in anchoring expectations, while additional unconventional support from the ECB, including that targeted at lending to small- and medium-size enterprises, could help repair monetary transmission, preventing a further credit contraction as measures to restore banking system health are being implemented."
Continued easing measures could help to boost economic output, which could in turn help reduce the eurozone's unemployment liability. Fewer unemployed persons would help to reduce government expenditures on unemployment benefits, which would lower deficits. The market would most likely react to this by lowering interest rates on peripheral debts, decreasing the interest expense on new debt, and further reducing deficits; thus, easier ECB policy could in fact help stave off the next round of the debt crisis.
Banking Union Necessary
The IMF also noted that efforts to push for a banking union across the eurozone were necessary to support regional and global financial stability. "Stepped-up efforts are needed to adopt the enabling legislation for the Single Supervisory Mechanism, agree on the Bank Recovery and Resolution Directive, and make progress on the Deposit Guarantee Scheme Directive."
The IMF also further emphasizes that a resolution mechanism that shares the burden of winding down failed banks across all countries is necessary to prevent modern-day bank runs on individual sovereigns. The IMF also recommends that nations "remove barriers to protected professions, promote cross-border competition, and raise productivity" to lower anti-competitive forces and make the entire currency zone operate more a single entity.
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