IMF gives damning indictment of euro area economic situation

By Ann Cahill, Europe Correspondent Examiner

Thursday, July 19, 2012

The IMF in it’s annual analysis of the euro area has given a damning
indictment of the current economic situation and the failure of EU
leaders and the ECB to deal effectively with it, saying the root
causes remain un-addressed.

Eurobills where countries pool their debt, should be issued first on a
small, short-term basis in exchange for the eurozone having veto
powers over national deficits and the receiving country pledging their
tax income to repay.

It recommends the eurozone proceeds quickly to create a full banking
union and fiscal integration, where governments would more closely
align their policies and have central oversight of their budgets.

The report notes that rather than improving, the crisis has
deteriorated, especially for the southern and peripheral countries,
with growing differences in terms of real euro value, exports,
imports, employment and growth. “Investors are withholding funds from
member states most in need, moving capital to save havens and driving
premiums to new records.”

The real economy has been weak, with growth flat in the first quarter,
reinforcing adverse bank-sovereign feedback loops, contributing to a
vicious cycle of weak confidence, with budget cuts further dampening
demand, increasing unemployment and all adding to budgetary pressures.

“The downward spirals between sovereigns, banks and the real economy
are stronger than ever… Contagion from further intensification of
the crisis would be sizeable globally. And spillovers to neighbouring
EU economies would be particularly large. A more determined and
forceful collective response is needed”.

It emphasises the role the European Central Bank must play in
preventing the situation getting worse and pulling the eurozone off
the cliff edge including using policies it has so far absolutely
rejected, such as full quantitive easing, more buying of sovereign
bonds, further liquidity provision and suggests it further lower its
rates from the current 0.75%.

A banking union would combine a pan-European deposit guarantee scheme,
a bank resolution mechanism and common supervision focusing first on
cross border and large systemically important institutions but later
on the entire banking system.

As a half way stage the EFSF/ESM — the EU’s rescue funds — could
provide financing for the deposit insurance and resolution frameworks,
combined with Commission draft legislation to bail-in unsecured
creditors. The ECB could act as the common supervisor.