International Monetary Fund, (2015), “Euro Area Policies Staff Report for the 2015 Article IV Consultation With Member Countries”, IMF Country Report No. 15/204 , July.
KEY ISSUES
Context. Real output has expanded for four consecutive quarters, and financial market sentiment has improved markedly. But the recovery is weak and uneven. Inflation has been too low for too long, financial markets are still fragmented, and structural gaps persist: these hinder rebalancing and substantial reductions in debt and unemployment.
Policies. The economic expansion is grounded in complementary policy actions at both the national and euro area levels, but more is needed to strengthen the recovery:
Supporting Demand. Recent ECB actions—including a rate cut, negative deposit rates and policy support for new bank lending to companies—should help address low inflation and financial fragmentation. But if inflation remains too low the ECB should consider a substantial balance sheet expansion, including through asset purchases. The broadly neutral overall fiscal stance is appropriate but any negative growth surprises should not trigger additional consolidation efforts as this would be self-defeating.
Mending balance sheets and completing the banking union. Successfully executing the ongoing asset quality review and stress tests should spur balance sheet repair and help reverse fragmentation. Agreement on a single resolution mechanism and bail-in rules comprise important milestones towards banking union, but a common fiscal backstop is still needed.
Advancing structural reforms. Alternative sources of funding through securitization, especially to credit-constrained SME’s, should be promoted. A comprehensive strategy, which boosts demand and removes country-specific structural impediments, is needed to tackle high youth unemployment. Competitiveness-enhancing reforms in debtor countries and higher public investment in creditor countries would promote needed rebalancing.
Relevant Posts
- International Monetary Fund (2014) “Euro Area Policies Staff Report for the 2014 Article IV Consultation With Member Countries“, IMF Country Report No. 14/198, July
- IMF, (2015), “Greece: An Update of IMF Staff’s Preliminary Public Debt Sustainability Analysis”, July
- Monastiriotis, Vassilis, (2015), “The IMF’s Preliminary Draft Debt Sustainability Analysis: what does it mean?”, LSE blog, 3 July