IMF Says Decisive Action in Europe Can Strengthen Growth and Avoid Economic Stagnation

IMF First Deputy Managing Director David Lipton today called on European policy makers to take decisive and sustained actions to strengthen the continent’s prospects for growth and avoid the risk of stagnation. In a speech in London, he praised “the important steps taken by the euro area” to address the crisis and urged further reforms “if Europe is to place the crisis in the rearview mirror and finally return to growth and job creation.”Europe is lagging behind the Unites States in the global “three-speed recovery” that is being led by emerging and developing countries, showing a modest growth of about 1 percent returning only in 2013 “The risk of stagnation is not remote in the face of weak growth, fragmented markets, impaired balance sheets, and half-completed reforms,” Mr. Lipton said.

To avoid this, 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,” Mr. Lipton added.

Despite the daunting challenges, Mr. Lipton said he remained optimistic as “Europe has risen to the challenge on difficult issues over and over again.” The IMF remains confident that they will continue to meet their commitments, he concluded.

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