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Eurozone in critical danger, says IMF

The eurozone is in ‘critical’ danger but can restore credibility with urgent action for a banking union, with some form of eurobonds, and if the ECB ramps up injections of cash, the IMF said on Wednesday.

The European Central Bank (ECB) should pull harder on its levers of special measures to buy government debt and fund banks, and should be open about its targets, the IMF said.

In a hard-hitting review of policies for the euro area, it warned: ‘The euro area crisis has reached a new and critical stage. Despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself.’

A worsening of the crisis would have a big impact on neighbouring European countries ‘and the rest of the world.’

It warned: ‘A determined move toward a more complete union is needed now.’

On growth, the International Monetary Fund said that the ‘stark’ truth was that eurozone countries had lagged the best performers for 50 years. The euro is slightly over-valued by zero to 5.0 per cent, the IMF estimated, but some countries in crisis needed a much bigger adjustment, of 5.0-10.0 per cent for Italy and 10.0-15.0 per cent for Spain.

Determined programmes for structural reforms to raise competitiveness were vital, the IMF said, warning also of a risk of deflation and suggesting that strong countries in northern Europe could allow wages and inflation to rise.

EU authorities should be flexible in mobilising new rescue funds to prevent contagion, for example if a crisis in a big bank threatened the financial system.

These IMF recommendations on eurobonds, inflation in strong countries and the role of the ECB run counter to the line taken by Germany and the ECB is also reticent about ramping up its special measures.
The view of the IMF is particularly significant because the fund is committed with EU authorities to direct bailouts for Greece, Ireland and Portugal.
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