The crisis in euro area has reached a "critical stage" with the financial markets in parts of the region remaining under acute stress despite major policy actions, the International Monetary Fund said in a review of euro area policies.
The Fund said Wednesday that the European Central bank can provide further stimulus to contain the escalation of the crisis. This could include interest rate reductions, quantitative easing, more SMP purchases and another round of liquidity provision.
The IMF called for determined action towards establishing banking and fiscal unions in the euro area to bolster monetary union.
"The immediate priority for the Eurozone is to establish a banking union and move toward more fiscal integration," said Mahmood Pradhan, Deputy Director of the IMF's European Department and mission chief for the euro area.
"These moves would help stem the decline in confidence engulfing the region, lower borrowing costs for countries facing severe market pressure, break the downward spiral between sovereigns and banks, and reduce the risk of contagion across the euro area," he said.
The policymakers in euro area must stand ready to support the banking system, including through a flexible use of the European bailout fund, if the crisis intensifies.
Also, these policies would need to be as growth-friendly as possible to soften the impact of fiscal consolidation on demand.
National governments, on their part, should carry out necessary fiscal reforms in a timely and credible manner. Transparent and comprehensive strategies to recapitalize viable banks should be implemented without delay, the report noted.
Policies should also focus on addressing external imbalances, boosting structural reforms and improve competitiveness within euro area.
Euro area economy is expected to contracted 0.3 percent this year and expand 0.9 percent in 2013. The pace of fiscal adjustment is particularly fast in the hard-hit periphery countries, and this is weighing on the growth outlook, the report said.
Projected consolidation for 2012-13 ranges from more than 4 percentage points of GDP in Cyprus, Portugal, Greece, and Spain, to 0.5 percentage points or less in Germany, Austria, Finland and Luxembourg. The rate of unemployment is expected to continue to vary widely across the region, from 5 percent in Germany to about 24 percent in Spain this year.
by RTT Staff Writer
For comments and feedback: firstname.lastname@example.org