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IMF / EURO AREA
STORY: IMF / EURO AREA
TRT: 02:51
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / NATS
DATELINE: 8 JULY 2016, WASHINGTON, DC / RECENT
RECENT - WASHINGTON, DC
1. Wide shot, exterior International Monetary Fund (IMF) building
2. Close up, IMF logo
8 JULY 2016, WASHINGTON, DC
3. SOUNDBITE (English) Ken Kang, Assistant Director, European Department IMF:
“The recovery of Euro continues, supported by low oil prices and accommodative monetary and fiscal policies. However, the risks to the recovery have increased both externally with possible slowdown in global growth, but also domestically with financial vulnerabilities as well as rising political risks as highlighted by the recent U.K. referendum. At the same time, the medium-term outlook remains very subdued, as the crisis legacies of high unemployment, and high level of public and private debt, as well as very deep rooted structural weaknesses continue to weigh in on growth. For this reason, collective action to boost growth and strengthen the union are urgently needed.”
RECENT – LONDON, UNITED KINGDOM
4. Various shots, streets
8 JULY 2016, WASHINGTON, DC
5. SOUNDBITE (English) Ken Kang, Assistant Director, European Department IMF:
“The U.K. referendum decision is likely to have negative impact on growth in Euro area. The U.K. is a very important trading partner for the euro area, accounting some 13 percent of exports with very strong financial link with the region. Our preliminary assessment is that higher uncertainty with greater market volatility and lower import demand is likely to lower the Euro are growth to 1.6% this year, and to 1.4% for 2017. However, the medium-term impact of the Brexit decision remain unclear, as it very much depends on the nature of the new relationship between the U.K. and the Euro area.”
RECENT – LONDON, UNITED KINGDOM
6. Various shots, streets
8 JULY 2016, WASHINGTON, DC
7. SOUNDBITE (English) Ken Kang, Assistant Director, European Department IMF:
“Against this backdrop of rising risks, sluggish growth and inflation, we continue to recommend more decisive collective actions across four major policy fronts. First, to create better incentive for more growth-friendly structural reforms. Second, to strengthen the fiscal framework while expanding centralized fiscal support. Third, to maintain accommodative monetary policy stance to boost inflation. And finally fourth, to clean up banks’ balance sheets while completing the banking union. Pursuing these policies simultaneously will generate greater benefits than pursing these policies separately. They will also enhance resilience at the eurozone to shocks, and help address external imbalances within the currency union, and also generate positive spillover effects for the global economy.”
RECENT – FRANKFURT, GERMANY
8. Wide shot, exterior European Central Bank
In its latest review of the euro area, the IMF said recovery in the currency union has strengthened, but the medium-term outlook remains weak and is endangered by a lack of collective action to address common challenges. Members must rebuild faith in the monetary union.
Ken Kang, Assistant Director of the IMF’s European Department, said “the recovery of Euro continues, supported by low oil prices and accommodative monetary and fiscal policies.
However, the risks to the recovery have increased both externally with possible slowdown in global growth, but also domestically with financial vulnerabilities as well as rising political risks as highlighted by the recent U.K. referendum.”
Kang also noted the fragile recovery that started in the euro area in 2014 has strengthened on account of consumer spending as more people find jobs, lower oil prices, a neutral fiscal stance, and accommodative monetary policy. However, medium-term growth prospects remain less bright. He said “the outlook remains very subdued, as the crisis legacies of high unemployment, and high level of public and private debt, as well as very deep rooted structural weaknesses continue to weigh in on growth.”
The subdued economic outlook is exacerbated by rising political risk in the euro area and the European Union (EU). Growing Euroscepticism has led to stark political divisions, which hinder a collective will to take crucial decisions for a stronger union—to deal with the refugee surge or address security concerns, for example. The recent United Kingdom referendum is likely to lead to persistent uncertainty regarding its new status vis-à-vis the EU. A slowdown in global growth could also undermine the recovery and raise the likelihood of stagnation.
Unless collective problems are resolved, the euro area is likely to suffer repeated bouts of economic and political instability leading to crises of confidence and economic setbacks. The EU should redouble efforts to ensure the benefits of economic integration and thus rebuild flagging faith in the monetary union. Countries should rapidly integrate refugees into their labor markets, while the block should reform its common border and asylum policy to protect social cohesion and preserve the single market.
To counter the risk of stagnation, the report calls for a big push on structural reforms to improve the business climate and employment as incomplete reforms hold back investment and lower growth potential. Easier access to the professional and retail service sectors, more efficient public administrations, and stronger insolvency regimes encourage investment and bolster the impact of labor market reforms. A fully functional single market in services, energy, transport, digital commerce, and free trade agreements can open up markets and enhance productivity by allowing firms to scale up.
Shrinking the cost of hiring workers and expanding cost effective active labor market policies can draw more workers into the workforce. The recovery is an opportune time to commit to reducing excessive protection for workers on regular contracts and overly generous financial disincentives for entering the labor market as these distortions keep unemployment too high for too long.
To ensure that policymakers take action, the reform agenda should be based on benchmarks related to reform outcomes that are directly under the control of policymakers as this will improve transparency and accountability. The report also emphasizes the need to even-handedly enforce the EU’s economic governance rules, which sets the reform agenda for member states in a broad range of policy areas.
Laden with high public debt, most euro area countries can ill afford to provide the fiscal support that is necessary to boost demand. These countries should change the composition of fiscal policy in a manner that supports growth and use the interest savings generated by easy monetary conditions to pay down their debt and rebuild buffers. Countries that have more budgetary space should use it to boost investment and support reforms.
In countries where demand is still low and which lack fiscal room, the EU could help with new or additional funds to support common investment projects such as in energy transmission and refugee settlement. Over the longer run, the EU should have the capacity to stabilize economic cycles.
But to garner political support and overcome moral hazard, such centralized support requires stronger enforcement of the fiscal rules of the zone. Access should therefore be conditional on compliance and the implementation of structural reforms. In the medium-term, the fiscal framework should be simplified as it has become too complex following successive reforms.
The European Central Bank’s supportive monetary policy of bond purchases and negative interest rates has helped ease financial conditions and the supply of credit. But if inflation stays stubbornly low or dips further, additional monetary easing will be necessary, mainly through larger asset purchases.
Banking sector profits have remained subdued, making it difficult to raise new capital. Bank supervisors should encourage the consolidation of the banking system.
Banks need to off-load bad loans at a faster pace in order to restore financial health and further expand credit. Ambitious targets for shedding bad assets are therefore necessary, as is less national discretion in banking supervision. Improved bankruptcy frameworks and a market for distressed debt could aid this process.
A common deposit insurance scheme with a common fiscal backstop is essential to completing the banking union. This will promote the flow of liquidity and promote pan-European banking. The European Deposit Insurance Scheme should be put in place rapidly, accompanied by measures to reduce banking sector risks. Faster progress toward a Capital Markets Union can help reduce overreliance on bank funding for capital and foster private sector risk sharing.
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