Front Matter Page
IMF Country Report No.12/181
EURO AREA POLICIES
2012 ARTICLE IV CONSULTATION
July 2012
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the Article IV consultation with member countries forming the Euro Area, the following documents have been released and are included in this package:
â–ª Staff Report for the Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 12, 2012, with the officials of euro area on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 3, 2012. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
â–ª Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 16, 2012 discussion of the staff report that concluded the Article IV consultation.
â–ª Statement by the Executive Director
The document listed below has been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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©2012 International Monetary Fund
EURO AREA POLICIES
STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION WITH MEMBER COUNTRIES
July 3, 2012
Key Issues
Context: 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. The adverse links between sovereigns, banks, and the real economy are stronger than ever. As a consequence, financial markets are increasingly fragmenting along national borders, demand is weakening, inflation pressures are subsiding, and unemployment is increasing. A further intensification of the crisis would have a substantial impact on neighboring European countries and the rest of the world.
Completing EMU: A determined move toward a more complete union is needed now to demonstrate policymakers’ unequivocal commitment to sustain EMU. This means measures to break the adverse loops between sovereigns and banks. To this end, the first priority is a banking union for the euro area, with a common supervisory and macroprudential framework, deposit guarantee scheme, and bank resolution authority. The progress made in this direction during the June 28-29 summit is welcome. To reduce the tendency for economic shocks in one country to imperil the euro area as a whole, banking union needs to be complemented by more fiscal integration—combining ideas of a political union and stronger central governance with more risk sharing. A unified statement of support for all of these steps by euro area governments, with a clear timetable of decisions, could arrest the decline in confidence engulfing the region.
Restoring strong and balanced growth: Changing the architecture will not be sufficient without measures to support growth. Structural reforms are essential to raise trend growth across the region and to improve competitiveness in deficit economies. But short-run support for growth will still be needed. Crisis measures remain important and, in the case of the European firewall, should be used flexibly. The recapitalization of weak banks—including through direct support from EFSF/ESM resources—will help break adverse fiscal-banking-growth feedback loops. Monetary policy can play a role in easing the transition until structural reforms become effective. Because inflation is low and falling, the ECB has room for lowering rates, and deploying additional unconventional measures would relieve severe stress in some markets. Fiscal consolidation should proceed decisively and credibly where market pressure is high, but more gradually elsewhere to help support demand in the region. The pace of adjustment should be guided by structural targets.
Approved By
Reza Moghadam and Tamim Bayoumi
Discussions took place during May 29–June 11, 2012. Mission members included M. Pradhan (head), H. Berger, P. Koeva Brooks, A. Al-Eyd, E. Perez Ruiz, A. Scott, T. Tressel, and N. Valckx (all EUR), S. Gray and J. Zhou (MCM), and M. Chivakul (SPR). Executive Director A. Fayolle and his Advisor P. Garcia Martinez, and Georges Pineau, ECB Observer at the IMF, participated in some meetings.1
Contents
KEY ISSUES
A DEEPENING CRISIS
WEAK OUTLOOK WITH SUBSTANTIAL RISKS
THE IMPLICATIONS FOR POLICY
A. The Case for Completing EMU
B. Restoring Strong and Balanced Growth
THE AUTHORITIES’ VIEWS
STAFF APPRAISAL
TABLES
1. Euro Area: Main Economic Indicators, 2007-2014
2. Euro Area: Balance of Payments
3. IMF Policy Recommendations for Selected Countries
FIGURES
1. Short-term Activity Indicators
2. Euro Area Inflation Developments
3a. Fiscal Outlook in the Euro Area: 2012 April WEO
3b. Fiscal Consolidation in the Euro Area: Challenges
4. LTROs: Effects on the ECB Balance Sheets and Bank Funding
BOXES
1. European Summit Policy Initiatives: Right Steps on the Roadmap
2. The Case for a Banking Union
3. The Case for a Fiscal Union
4. The Impaired Monetary Transmission in the Euro Area
5. Further Use of Long-Term Refinancing Operations (LTROs)?
APPENDIX I: STATISTICAL ISSUES
Front Matter Page
Public Information Notice (PIN) No. 12/80
FOR IMMEDIATE RELEASE
July 18, 2012
International Monetary Fund
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IMF Executive Board Concludes Article IV Consultation on Euro Area Policies
