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IMF Urges Euro Zone To Target Debt

by Ulrika Lomas,, Brussels

08 June 2010

The International Monetary Fund (IMF) has warned that fiscal policy introduced to-date has not been sufficient to prevent further risks to the stability of the Euro Zone, and has urged European nations to act cohesively to target debt levels to bring confidence to the markets.

The IMF annual review of Euro Zone policies said that countries should avoid a one-size-fits-all fiscal adjustment strategy, and underscored that policy responses should be adapted to the individual characteristics of each of the euro area’s 16 member countries. At the same time, the IMF said that countries facing market pressures have no choice but to go ahead with forceful fiscal adjustment.

The report, published on June 7, stated:

“The current euro area crisis results from fiscally unsustainable policies in some countries, delayed repair of the financial system, insufficient progress in establishing the discipline and flexibility needed for a smooth functioning of the monetary union, and deficient governance of the euro area.”

“Delayed or half-hearted fiscal consolidation in countries facing high spreads could trigger a further loss of financial market confidence in the fiscal sustainability of some member states, a spike in risk premiums and a sharp depreciation of the euro.”

“National authorities must now quickly implement a distinct set of policies for each member state to underpin fiscal sustainability, as several are doing, and boost sustainable growth. Governments should explicitly commit to specific policy actions, coordinated in a euro area context. Policy action is not only necessary in member countries suffering from market tensions or competitiveness problems, but throughout the euro area to generate confidence, display cohesion, and improve overall investment and growth prospects.”

The report calls for “immediate action” to:

  • Establish fiscal sustainability, with the pace of consolidation differentiated to take into account financial market pressures and the state of the recovery;
  • Spur growth, including by implementing a set of priority, country-specific structural reforms throughout the euro area;
  • Accelerate the restructuring of the financial system, which would include completing the EU’s financial stability architecture by building on progress in establishing more harmonized regulation and supervision of the EU financial system.
  • Strengthen economic governance of European Monetary Union. As recognized by the Commission and the President’s task force, the focus, the IMF said, should be on enforcing budgetary discipline, helped by fundamental legislative reform, and on addressing macroeconomic imbalances.

Concluding the report said:

“Fiscal actions will need to balance these considerations with the feeble state of the recovery. Overall, the area-wide fiscal stance is correctly set to remain broadly neutral in 2010 as countries with manageable debt dynamics continue to provide adequate stimulus to nurture the recovery.

Nonetheless, fiscal consolidation is inevitable, and will need to start in all countries in 2011 at the latest. Its pace should be differentiated across member states. Countries should stand ready to adjust their fiscal plans depending on the state of the financial system and the degree to which fiscal actions help bolster confidence.”

TAGS: tax | economics | fiscal policy | law | banking | financial services | budget | International Monetary Fund (IMF) | tax reform | European Union (EU) | services | Europe

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