IMF: Eurozone Trouble Goes Beyond Greek Crisis

The eurozone's economy will fall further behind that of the U.S. without a concerted effort to boost demand through increased government spending and lower taxes, make labor markets more flexible, and rid banks of bad loans, the International Monetary Fund said Monday. In its annual review of the currency area, the Fund said that while the situation in Greece is "fluid" and "a key source of uncertainty," the threat of contagion has eased since the early years of the currency area's debt crisis. However, the IMF warned that the eurozone faces longer-term speed limits to its economic growth that will see incomes fall further behind those in the U.S. over the coming five years unless governments take immediate action. "Given the weak medium-term outlook, a stronger collective push is urgently needed to consolidate the recovery, raise potential growth, and strengthen the union's resilience," the IMF's economists said. The eurozone economy returned to growth in mid-2013, but has advanced only modestly since then. In the first quarter of this year, it expanded by 0.4%, and most indicators suggest that pace was maintained in the three months to June. At that rate, the IMF said inflation will be below the European Central Bank's target of just under 2% through 2020, while unemployment will stay high. The gap between output per person in the U.S. and the eurozone is already at its greatest since the currency was launched in 1999, and will widen further if nothing is done boost growth, the Fund predicted. Its economists said the ECB should proceed with its stimulus program at least until September 2016, the date it has tentatively set for completing its bond purchases. "We think it is likely they will need to go beyond September 2016," said Mahmood Pradhan, deputy director of the IMF's European department. It also urged governments to take advantage of the "windfall" from the lower borrowing costs the ECB's program has delivered and other room for maneuver to increase spending and cut taxes, judging they could do so to the equivalent of 0.6% of the eurozone's combined gross domestic product without breaking the currency area's budget rules. In addition to those measures to stimulate demand, the IMF said governments should push ahead with reforms to labor markets that make it easier to hire and fire workers, and eliminate distinctions between those with very high and very low levels of job security. The Fund also urged the eurozone's new, shared bank supervisor to lead "a more aggressive, top-down strategy" that writes down or restructures bad--or nonperforming--loans held by banks. Figures released Monday showed banks raised their lending to businesses by just 0.1% in June from a year earlier. "Europe's experience contrasts sharply with that of the U.S. recently and Japan in the 2000s where, after their financial crises, aggressive NPL resolution helped support a faster recovery in credit," it said. Taken together, the Fund said those steps would raise economic growth to 2.7% and 3.0% for 2015 and 2016 respectively, from the 1.5% and 1.7% it now forecasts. The revival of the Greek crisis in 2015 has raised fresh questions about the way the eurozone's economy is managed. In an interview published Monday, ECB executive board member Benoît Cœuré criticized the current system in which individual nations bargain with each other, and called for more centralized governance. "The compromises reached are unlikely to be the best outcome for the euro area as a whole, but instead represent the greatest common denominator between the member countries," he told Le Monde. "There is an urgent need to abandon this intergovernmental process in favor of a process of shared decision-making based on votes and democratic legitimacy." The IMF didn't go quite that far, but called for policy-making that takes more account of the good of the eurozone as a whole, with simpler and more transparent ways of judging whether member nations are delivering promised reforms and sticking to budget rules. "Euro area governments should move faster toward more risk sharing, more fiscal integration, which would make the euro area more resilient to idiosyncratic events in individual countries," Mr. Pradhan said.