The International Monetary Fund has said that spillovers from a failure of policies to get ahead of the euro area debt crisis could affect the entire Europe as the stresses are no longer a confined to the peripheral countries in the single-currency bloc.
Policy reactions by the whole euro area and its partners can mitigate these effects, the Fund said in its 2012 Spillover Report, published Thursday.
Despite the progress in the face of constraints, not enough has been done to stop the spread of stresses and attenuate fiscal-growth-banking feedback loops, the report pointed out.
"These stresses have spread to the point that the observed increase in sovereign risk premia of many euro zone countries is predominantly driven by a common factor rather than by country-specific macro/liquidity risks," the Fund said.
IMF's simulation results show that output in the euro area could be cut by five percentage points in the absence of an effective policy response. Another scenario assumes that the borrowing costs for troubled Eurozone economies, including Italy and Spain, would rise around 300 basis points.
In his post-meeting press conference on Thursday, European Central Bank President Mario Draghi said the bank may craft plans in the coming weeks to make outright purchases of government bonds.
However, political leaders in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination, Draghi said. ECB decided to leave the benchmark interest rate unchanged at 0.75 percent during the meeting.
by RTT Staff Writer
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