IMF lauds eurozone recovery, but ‘significant’ risks remain

‘Decisive actions’ by governments needed

The IMF on Tuesday said the eurozone economic recovery was broad and strengthening, but warned that low inflation, fragile banks and Brexit remained significant risks.

“The recovery is firming, with growth and job creation returning in many countries that went through severe downturns,” the International Monetary Fund’s executive board said in its annual report on the 19-nation single currency bloc.

However, all was not rosy, with an improving outlook in the short-term “clouded by significant downside risks,” it warned.

These required “decisive actions” by governments, including the adoption of tough reforms and, in certain cases, extra public spending on growth friendly projects and investments.

Given the persistent challenges, monetary policy at the European Central Bank “should remain firmly accommodative until there is a sustained rise in the inflation path” toward the ECB’s objective of just below 2.0 percent.

This effort should not let up even if certain countries, such as Germany, saw inflation reach target level well before others, the IMF added.

The IMF noted that core inflation, which strips out the highly fluctuating cost of energy, “remains stubbornly low,” hobbled by poor wage growth and high unemployment in some countries.

The IMF confirmed it expected the eurozone to deliver solid growth of 1.9 percent in 2017 and that this would slow to 1.7 percent in 2018.

The slowdown would stay for the medium-term with growth expected to idle at about 1.5 percent over the next few years, the IMF added.

The fund urged eurozone governments to use the current growth spurt to fix public finances, impose reforms and achieve deeper integration of the currency bloc, all highly sensitive projects in European capitals.

In order to achieve deeper integration, the IMF said over-spending countries, such as France and Italy, need to obey EU rules on the public finances and win the trust of their partners.

A big hurdle to higher growth was Europe’s bloated banks, which are burdened by about one trillion euros in non-performing loans that stand at a high risk of never being repaid, the IMF said.

Overall, these fragilities left the eurozone too vulnerable to unforeseen shocks.

The dangers include the still unknown consequences of the UK’s impending divorce from the EU, which, “could dampen investment and consumption” in some eurozone countries, it said.