“A moderate shock to confidence – whether from lower expected future growth or heightened geopolitical tensions – could tip the bloc into prolonged stagnation”, said Mahmood Pradhan, the IMF’s mission chief for the eurozone.
Advertisement
Loans to the private sector in the euro area, a gauge of economic health, increased slightly year-on-year in June, but only at the same pace as a month earlier, the European Central Bank said Monday. But the medium-term outlook remains weak, weighed down by the legacies of insufficient demand, lagging productivity, and weak bank and corporate balance sheets.
In a special report published on Tuesday, the council of five experts known as the “wisemen”, said the Greek debt crisis had underscored the urgent need for further reforms to make the euro zone more stable.
However, a final deal between the Greek government and its creditors faces an array of challenges, including growing skepticism over whether the bailout plan can return Greece’s ravaged economy to health. “Directors urged policymakers to use all the available instruments, if needed, to manage contagion risks that might originate from Greece”, said a statement from the directors.
Staff at the European Central Bank expect eurozone gross domestic product to expand by 1.5% this year, in light of a rapidly improving Spanish economy and sturdy growth in Germany.
Inflation would remain near zero in 2015 and rise to 1.1% in 2016, the International Monetary Fund predicted.
Early members failed to recognize that lower borrowing costs, a key benefit in the currency union, would only provide a temporary boost, and left unchecked, would actually lead to numerous troubles that plunged the bloc into its debt crisis. In the meantime, the unemployment rate remains high, above 11% for the whole eurozone and near 25% in Greece and Spain.
“These include high unemployment, especially among the youth; large corporate debt; and rising non-performing loans in the banking system”.
The report also calls for a simpler governance framework for the regulation of financial markets, with a capital markets union that would help diversify funding sources for small- and medium-sized enterprises, reduce reliance on bank lending, and promote more cross-border finance.
The Fund urges eurozone policymakers to do more, such as shake up insolvency rules, to get bad loans off banks’ balance sheets and so free up the financial sector to lend more.
Advertisement
Howard Archer, of IHS Global Insight, said the data showed positive, if tentative, progress.
