Europe Not Us­ing Good Eco­nomic Growth to Re­form


WASH­ING­TON (Dis­patches) - Eu­ro­pean eco­nomic growth is strong, mainly thanks to do­mes­tic de­mand, but gov­ern­ments are not tak­ing suf­fi­cient ad­van­tage of the good times to re­duce their debt and im­ple­ment re­forms, the In­ter­na­tional Mon­e­tary Fund said.

The IMF fore­cast that growth in ad­vanced Eu­ro­pean economies, mainly the euro zone, would slow to 2.3% this year from 2.4% in 2017 and then de­cel­er­ate to 2% in 2019. The Eu­ro­pean Com­mis­sion fore­casts the same growth slow-down. “Amid the good times, how­ever, fis­cal ad­just­ment and struc­tural re­form ef­forts are flag­ging,” the IMF said.

“With eco­nomic prospects con­tin­u­ing to im­prove in the short term but medium-term prospects less bright, pol­i­cy­mak­ers should seize the mo­ment to re­build room for fis­cal ma­noeu­vre and push for­ward with re­forms to boost growth po­ten­tial,” it added.

De­spite the strong growth, some of the big­gest euro zone economies like France, Italy or Spain have been slow to fur­ther re­duce their budget deficits towards a bal­anced po­si­tion while oth­ers, like Bel­gium, are in­creas­ing the short­fall.

“In many economies, pol­i­cy­mak­ers should strive to bring fis­cal deficits within range of bal­ance over the next few years,” the IMF said.

“This way, au­to­matic sta­bilis­ers and fis­cal stim­u­lus can be de­ployed again, should down­side risks ma­te­ri­alise. Also, sta­bil­isng and bring­ing down pub­lic debt would help economies bet­ter cope with the pres­sures from grow­ing ex­pen­di­tures on pen­sions and health care,” it said.

The IMF also noted that the strong eco­nomic growth pro­vided an op­por­tu­nity for faster deep­en­ing of euro zone eco­nomic in­te­gra­tion, pri­mar­ily through the com­ple­tion of the bank­ing union. This al­ready fea­tures a sin­gle su­per­vi­sor for euro zone banks and a sin­gle res­o­lu­tion au­thor­ity but still lacks a joint de­posit guar­an­tee scheme.

With Bri­tain, a ma­jor fi­nan­cial cen­ter, due to leave the Eu­ro­pean Union in March 2019, the EU should speed up the con­struc­tion of a cap­i­tal mar­kets union to widen fi­nanc­ing choices of small and medium-size firms, har­mo­nize in­sol­vency laws and pro­tect cross-bor­der in­vestor rights, the IMF said.

The IMF also threw its weight be­hind the idea of cre­at­ing a pool of money for the 19 coun­tries that share the euro to help their economies against crises not of their own mak­ing.

The IMF called it the “cen­tral fis­cal ca­pac­ity (CFC)” and said it should work on the ba­sis of loans, not per­ma­nent trans­fers.

“The CFC could em­ploy some­thing known as a ‘usage premium’, through which a coun­try pays a premium in good times based on trans­fers it got in bad times,” the IMF said.

“Sec­ond, the CFC could place a cap on the amount coun­tries must con­trib­ute to pre­vent some coun­tries from be­com­ing large net con­trib­u­tors. Fi­nally, it could limit how much a coun­try can re­ceive, so that trans­fers do not sub­sti­tute for nec­es­sary pol­icy ad­just­ment,” it said. Euro zone coun­tries are also con­sid­er­ing ideas for such a loan-based budget. The Eu­ro­pean Com­mis­sion pro­posed ear­lier this month it should be part of the over­all long-term budget of the EU and to­tal €55 bil­lion.

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