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IMF cuts eurozone growth forecast amid 'major' challenges

Tuesday, April 12, 2016 - 22:04

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The IMF cut its growth forecasts for the eurozone on Tuesday as the refugee crisis, terrorism and the threat of Britain choosing to exit the EU weighed on the outlook.

[BRUSSELS] The IMF cut its growth forecasts for the eurozone on Tuesday as the refugee crisis, terrorism and the threat of Britain choosing to exit the EU weighed on the outlook.

Europe has never quite emerged from the debilitating debt crisis that erupted in 2010 in Greece before spreading across the eurozone, requiring massive German-led bailouts and sparking acrimony that nearly saw the single currency area implode.

While predicting "weak growth", the IMF said deep problems endured in the eurozone, with unemployment still high and crucial reforms still not done in many of the bloc's 19 member nations.

The IMF said the eurozone should grow a modest 1.5 per cent this year, down from the 1.7 per cent estimated in January and slower than the 1.6 per cent seen in 2015.

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Next year, the eurozone economy would likely expand 1.6 per cent, down from the earlier forecast of 1.7 per cent.

Adding onto the "Brexit" danger, "is the tragedy of large scale refugee inflows, especially from the Middle East", said Maurice Obstfeld, the IMF's chief economist.

"The result could be a turn to toward more nationalistic policies, including protectionist ones," he warned.

With real recovery still missing, the arrival of refugees was stoking populist fires in Europe, the IMF said.

This was endangering the EU project, born in the aftermath of World War II, as Europeans feared for their jobs and more generally about the future.

"The surge of refugees is presenting major challenges" to the EU labour market "and testing political systems," the IMF warned in unusually stark terms to describe one of the world's richest regions.

This was "fueling scepticism about economic integration, as well as EU governance, and potentially hindering policymakers' ability to respond to ... economic challenges," it added.

The "fear of terrorism was also a factor," it said.

The Washington-based IMF said the "modest recovery" in Europe was still suffering as high levels of debt and low productivity growth outweighed the positive effects of cheap oil and rock-bottom borrowing rates.

Amid these important challenges, the IMF urged the European Central Bank to not flinch from its existing efforts to boost the growth, despite growing opposition in Germany, the eurozone's biggest economy.

The ECB has launched a massive, more than one-trillion-euro stimulus programme to bolster the economy, pouring cheap money into the system in an effort to get cautious banks lending again to businesses.

So far the medicine has had only very mixed results, with inflation, a key reflection of consumer demand, remaining stubbornly low.

These measures have "supported the recovery by improving confidence and financial conditions," the IMF said.

"But persistently low inflation and subdued growth point to the need for policy to remain accommodative for an extended period," it added.

The IMF also decried the lack of convergence among eurozone economies, warning especially that the crucially needed recovery in the countries worst hit by the debt crisis may be losing steam.

Bailed-out Portugal, once a model of good economic choices in Europe, would see growth slow both this year and next with unemployment still stuck in the double digits, the IMF said.

AFP

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