IMF warns that euro crisis has reached new and critical stage

18 July 2012 18:41  [Source: ICIS news]

WASHINGTON (ICIS)--The International Monetary Fund (IMF) on Wednesday warned that the European sovereign debt and financial crisis has reached “a new and critical stage” and that the euro currency union is at risk of collapse.

In its new 50-page review of the status of the economic and monetary union (EMU) of the eurozone group of nations, the IMF cautioned that “despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself”.

The IMF was referring to the June meeting of eurozone leaders and finance ministers in which a €100bn ($123bn) fund was agreed to support Spain’s wobbly banking sector.

The financial summit also agreed to ease economic reform demands on Madrid, and in return the Spanish government announced new taxes and spending cuts.

But many analysts think those measures – and other steps taken to shore-up the failing economies of Greece, Portugal and Ireland – may not be sufficient to stop the eurozone slide toward collapse.

Wednesday’s report by the IMF appeared to echo those concerns, noting that “financial markets are increasingly fragmenting along national borders, demand is weakening ... and unemployment is increasing”.

“A further intensification of the crisis would have a substantial impact on neighbouring European countries and the rest of the world,” the IMF analysis said.

The white paper also pointed out that as the eurozone crisis deepens, “the outlook remains for very low growth” among the European nations as a whole.

After eurozone gross domestic product (GDP) growth of only 1.5% in 2011, the IMF said that this year’s GDP is expected to range between a 0.3% contraction and a best-case growth of only 0.7% for 2012 and 2013 as well.

Only Germany and France, the two top economies among the eurozone nations, are expected to show positive growth this year, the IMF said.

To resolve the crisis and avoid collapse of the EMU and the euro, the IMF said that “a determined move toward a more complete union is needed now”.

“To this end, the first priority is a banking union for the euro area, with a common supervisory and macroprudential framework, deposit guarantee scheme, and bank resolution authority,” the recommendation says.

The banking union, said IMF, “needs to be complemented by more fiscal integration – combining ideas of a political union and stronger central governance with more risk sharing”.

But such a more powerful central European government and financial risk-sharing is broadly opposed by Germany, and other European governments are leery of giving up the significant share of national sovereignty that would be required for a eurozone fiscal union with real authority and control over member nations’ budgets, financing and banking. 

And, even without German opposition, analysts say that getting the 17 eurozone nations and their legislatures to agree on detailed terms of a banking union and “a stronger central governance” could take many months, perhaps years – a luxury of time that the deepening crisis might not allow.

The IMF was established in the closing days of World War II to promote international monetary co-operation and stability, foster economic growth and employment and to provide financial assistance to countries to help ease balance of payments problems.

Under its multinational mandate, the IMF periodically reviews the economic conditions and stability of its 188 member countries and major multinational trade or financial unions such as the eurozone.

The dire IMF analysis of the euro crisis follows its announcement on Monday that it was lowering its outlook for global economic growth for this year and 2013, and its 3 July analysis of the slowing US economy, predicting that normal US GDP growth was not likely to return until 2015.

($1 = €0.81)

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By: Joe Kamalick
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