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Tuesday, April 16, 2013

IMF sees a mixed outlook for Europe - calls for more ECB action and a fiscal union

The IMF today released its latest World Economic Outlook forecasts. As usual the forecasts are not overly different from the previous ones - published in October last year - but there are a few interesting points.

The map above gives a pretty good feeling for just how bad Europe is doing relative to the rest of the world at the moment (click to enlarge).

The IMF warns about the risks of complacency and lack of  implementation of reform and austerity measures in the eurozone, something we touched on here:
Amid reduced market pressure and very high unemployment, the near-term risks of incomplete policy implementation at both the national and European levels are significant, while events in Cyprus could lead to more sustained financial market fragmentation. Incomplete implementation could result in a reversal of financial market sentiment. A more medium term risk is a scenario of prolonged stagnation in the euro area.
This seems to be clear reference to the banking union and the creation of a cross-border resolution mechanism to deal with banking crisis such as the one seen in Cyprus. This is a valid concern - there is huge uncertainty over the banking union.

The IMF also notes that while current account adjustment has been progressing in the eurozone it is not clear whether it is simply cyclical or the result of deeper reform:
Current account balances of adjusting economies have improved significantly, and this improvement is expected to continue this year. This increasingly reflects structural improvements, including falling unit labour costs, rising productivity, and trade gains outside the euro area. But cyclical factors also play a role, notably layoffs of less productive workers, and would reverse with eventual economic recovery.
Further to that point, there is also the interesting table below showing that Greece, Ireland and Spain have had some success in reducing unit labour costs (change is difference between the dot and the diamond). Greece mainly through cutting labour costs but the others also through increasing productivity. But there is some way to go yet, while countries such as France and Italy have made little to no adjustment. It's also worth keeping in mind that, while Portuguese ULCs have fallen from their peak, the trend and some of the fall has now been reveresed.

In addition, there are continued signs of a split in policy approach between Germany and the IMF. Comments such as these are unlikely to go down well in Germany:
Room is still available for further conventional easing, as inflation is projected to fall below the European Central Bank’s target in the medium term.

Greater fiscal integration is needed to help address gaps in Economic and Monetary Union design and mitigate the transmission of country-level shocks across the euro area. Building political support will take time, but the priority should be to ensure a common fiscal backstop for the banking union.
We'd have thought, after three years of being exposed to the politics of the troika, the IMF might be a bit more sensitive to the political intracacies of the eurozone crisis. However, it does highlight that the fundamental choice facing the eurozone has not gone anywhere..


Rik said...

If the IMF is really afraid that the EZ is way TBTF it could have started by now with mainly focussing on the issues that are realistic next to necessary.

The EZ will break apart from the South is by far most likely scenario anyway. And if the North moves the problems will mainly occur in the South as well. So the South is the key.
And for the South to survive they need reform and a lot of it and Northern guarantees/support (directly or via the ECB, but the ECB's without the North's support are nearly worthless).
And the North being overstretched in that demand a much bigger risk than the political problems in the South. At the end of the day the South will simply have to accept until they have their business in order and could realistically leave (but donot need it anymore).

Anyway some risk will have to be taken and if necessary one or more countries been shown the exit. also as an example for the rest. Now no risk is taken but also nothing is happening. The biggest step forward by far was the Dijsselbloom blooper. Looks about time for another one.
All the time the Draghi bluff brought has been waisted and there might not be much left. Simply totally unsustainable. The longer it takes support both South and North will be leaking away.

Banking union (at least the guarantee part) and fiscal union are not going to safe this one and only morons think otherwise.

Play with the cards you have or fold.

Anonymous said...

The South will not sustain those austerity reforms much longer. The social unrest is getting dire every single day. The North must be aware of that or, otherwise, they could get an explosive situation with no containment.
One or more Southern countries will leave and, as soon as they get back to growth, others will follow and by by Euro.Sorry Rik,they won't accepted the fate, they will leave and then someone will pick up the pieces. Not them. The US won't allow another war in Europe and they will get in the mix.
I've checked closely all the Southern countries reforms(luckily I do speak more than the regular Northern languages and I can get by the propagandistic Northern paraphrasia and actually read the newspapers). And, right now, with the exception of Italy, Spain, Portugal and Greece(here I thank my cousin who lives there far enough to understand fluently the language) have done far more reforms than the ones Reh likes to insist telling to journalists that they should do. The problem is that austerity doesn't work, without fiscal transfers and a different ECB mandate. Without changing, who does wanna bet when the Euromark gets kaput?

Joe L

Rik said...

1. Very similar in the North and between 2 parties of which one has the money it is clear how things will go. Money talks and PIIGS walk.
2. Let one leave or two. Personally I always thought that be unavoidable btw. And as it probably still needs to happen better sooner than later postponing makes things simply longer bad Japanese for all.
Let them bear the consequences thereof and those won't be pretty. The North and its banks will lose a lot of money, but the South will vanish as an economy of any significance.
However it simply looks that they simply donot have the balls to face the music, they not even have the stomach to create a sutuation in which negotiating would have been a lot eassier for them.
3. Nothing to do with Northern rhetoric. Simply markets decide at the end if reforms are sufficient. Without ECB support and implicit Northen EZ support, they would be dumped left right and middle. It simply isnot enough for the purpose. Whether you the South itself or Mr Reh considers it enough is simply not relevant.
4. This is a decision or more likely chain thereof that will be taken by the public one way or another. And the public (via elections) doesnot give a damm about what the US thinks. In this respect US involvement at the wrong time will rather work counterproductive than beneficial for keeping the thing together.
5. Nice to know btw that next to English you also speak some French. Probably one of the view AngloSaxons who does.

Rollo said...

A man cannot serve two masters; nor can a woman. Christine Lagarde has two masters: 1 is the need for proper fiscal rectitude; the other is the one she was educated in, the Grande Ecole where top French people are taught to keep france hopping on the biggest lily in the pond. She is despearate to save the French from Cyprusification, to which french policies have been driving them for the last 20 years.

christina speight said...

There's little point in pursuing the details of the IMFs latest without seeing just where the IMF has gone off the rails! [all forecast of growth from everybody are guesses and 95% are wrong - the other 5% are lucky !)

Very often the best factual source of economic FACTS is (after OE of course!!) is the Telegraph BUSINESS NEWS and in this context "Protecting the eurozone at all costs is undermining IMF’s validity" by Jeremy Warner. :- http://www.telegraph.co.uk/finance/comment/jeremy .......

When Strauss-Kahn resigned his place was filled - as usual - from France. Christine Lagarde was not only France's finance minister, steeped in the euro and its machinations, but makes no secret of her ambition to become French President. The result is that she pays virtually no attention to the majority of members who are committed to the IMF's decisions although they get virtually no say these days! This has not gone unnoticed

The IMF under Lagarde has been at the centre of all the twists and turns to bolster-up the Euro and after 5 years of this "we are still lurching from one failed baqil-out to the next"
Warner points out that becoming part of the "troika" supervising successive countries it has compromised its position so that it has become part of the eurozone management and no longer looks at the wider picture as to whether the euro is itself suitable for its growing list of EU clients. The terms that the Troika imposes are classic IMF ones with one critical exception. All the austerity measures are normally accompanied by a demand for devaluation. In the case of euro members devaluation is impossible. ALL of these countries would have benefitted greatly by that one simple act but the euro keeps them in permanent depression and slump - and subjection.

Prices and incomes across the eurozone have despite all the problems actually converged , This tends towards making the periphery countries progressively less competitive and inevitably they crash with capital fleeing to safer climes . Meanwhile Germany prospers from their misery without actually intending to! Germany's most recent suggestion (an unofficial bit of kite-flying) of a wealth tax in bail-out' countries is barmy as the capital outflows would increase exponentially if they did.

"The way things are going the euro will end up poisoning the IMF as comprehensively as the [euro's] member states."

THE IMF IS PART OF THE PROBLEM and no longer part of a solution to anything

Anonymous said...

I believe that Mme Lagarde has a very poor track record and should resign.

She has had a direct hand in France's ill-advised economic policy which will, no doubt, soon leave them in debt and ruin. Lagarde has also had her fingers in the Euro and has inserted Napoleonic Law into the AIFM Directive(!) which has helped make it even more unworkable.

Whay are we rewarding failure and mediocrity?