IMF gives uninspiring prognosis for euro zone

[HenryTo]

Lots of posts on Europe tonight:
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IMF gives uninspiring prognosis for euro zone

August 03, 2005 15:37
The International Monetary Fund today cut its growth forecasts for the 12-nation euro zone and appealed for decisive political action to revive an arthritic economic performance.

The IMF said it now expected the euro area economy to grow by 1.3% this year and by 1.9% next. The organisation's previous forecasts given in April foresaw growth of 1.6% in 2005 and 2.3% in 2006.

In an annual review of the euro zone, the IMF board of directors also said that an interest rate cut by the European Central Bank might be 'appropriate' in the coming months if evidence mounts of a fading recovery.


The report underlined that what it called a 'low-flying recovery' in the euro zone has failed to provide the spark needed to revive growth convincingly or to bring down high unemployment. The fault for weak corporate and consumer confidence lies largely with a lack of reformist zeal on the part of European governments, the IMF signalled.

'Directors considered that the fundamentals remain in place for the modest recovery to resume in the second half of 2005, but with downside risks continuing to prevail,' the review said. The IMF said that against this background, 'directors called for a more decisive and consistent pursuit of forward-looking policies aimed at strengthening fiscal adjustment and structural reform'.

The IMF has long said that euro zone nations such as France and Germany need to loosen restrictions on hiring and firing, cut the role of the state and unbundle red tape if Europe is to start catching up with US rates of growth. Last week, in a similar review of the US, the IMF predicted the US economy would expand by 3.6% this year and by 3.5% in 2006.

The direction of reform in the euro zone has been complicated by the failure of EU leaders to agree on a long-term budget at a bitterly divisive summit in June. The summit came after voters in France and the Netherlands rejected the EU's proposed constitution, laying bare fears among many Europeans that their cherished social welfare protection will be eroded by US-style free markets.

The IMF said that 'now more than ever, effective implementation of reforms will call for the leadership and determination of both national capitals and the European Council of EU leaders'. This was especially true in fiscal policy, as several euro zone governments struggle to keep their deficits under an EU ceiling of 3% of output.

The IMF said an EU agreement this year to loosen the Stability and Growth Pact, which mandates the deficit ceiling along with other financial requirements on euro zone members, must not lead to budgetary profligacy.

For some EU governments, weak growth has been exacerbated by the ECB's reluctance to bring down euro zone interest rates, which have been stable since June 2003 and are widely expected to stay so until well into next year.