The 17 countries that use the euro have to integrate their economies further if they are to emerge from their economic crisis intact, the International Monetary Fund said Wednesday.
In its latest assessment of the eurozone, the Washington D.C.-based institution urged Europe's leaders to "demonstrate shared and unequivocal commitment — with a clear, credible roadmap — to a deeper integration of the euro area."
Though conceding that the immediate priority is to break the negative link between governments and the banking sector — where an indebted country supports its banking system so it can buy more government debt — the IMF said the eurozone must push on with its efforts to strengthen the monetary union and promote economic growth. The IMF is predicting that the eurozone's economy will shrink 0.3 percent this year and grow only 0.9 percent next. The downside risks, it added, are severe.
Mahmood Pradhan, deputy director of the IMF's European Department, said the eurozone is not functioning properly and what is needed is to "complete the union."
Pradhan highlighted three areas where more integration was needed:
— Eurozone leaders must push through with the plan they agreed in late June to create a banking union with a common supervisory framework. He also said a pan-European deposit guarantee scheme is required.
— The drive to greater fiscal integration has to continue. This needs to be backed up by stronger pan-European oversight and enforcement. The euro countries have already agreed to strict budgetary controls, which in theory should prevent governments from running up too much debt.
— The eurozone countries have to reform their economies to boost their long-term growth prospects and balance out the big differences in trade performance across the region.
"These moves would help stem the decline in confidence engulfing the region, lower borrowing costs for countries facing severe market pressure, break the downward spiral between sovereigns and banks, and reduce the risk of contagion across the euro area," Pradhan said.
Until these measures are introduced, the IMF said the eurozone must continue to use emergency bailout funds and maintain a supportive monetary policy. In addition, it said that those countries that are not under intense market pressure should ease off their austerity measures.
Pradhan also expressed the hope that a sharing of debt could eventually be agreed — provided strict rules are in place to prevent any one country from abusing the system. Many in the markets think that the creation of eurobonds — which would effectively allow countries like Greece and Spain to benefit from Germany's super-low borrowing rates — is the ultimate answer to the eurozone's problems.
The European Central Bank also came under scrutiny with Pradhan saying that it still has room to cut its main interest rate further from the current record low of 0.75 percent as well as introducing more "unconventional" policies. He said it could step up its program to buy up bonds of Europe's more indebted countries in the markets and pursue a monetary stimulus, similar to what other central banks such as the U.S. Federal Reserve and the Bank of England have enacted.
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