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23rd Jun 2018

IMF warns Europe of falling behind US on recovery

  • Paris: France's gloomy outlook is weighing on Europe (Photo: Moyan Brenn)

Europe is falling behind the US in emerging from the economic crisis, with sluggish growth in Germany and recession in France worsening the outlook for eurozone periphery countries, the International Monetary Fund (IMF) has said.

"Recent good news about the US has come with renewed worries about the euro area. Given the strong interconnections between countries, an uneven recovery is also a dangerous one," Olivier Blanchard, IMF chief economist said Tuesday (16 April) when presenting the World Economic Outlook.

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The IMF forecasts growth in the US to be at 1.9 percent this year and 3 percent in 2014, while the eurozone economy will contract by 0.3 percent this year and grow by only 1.1 percent in 2014.

But apart from the known troubles in Italy and Spain, where the economy is set to shrink "substantially" this year, Blanchard flagged up "weaknesses in the core," a reference to Germany and France.

Germany's growth is forecast to be only 0.6 percent this year, while France will have a "slightly negative forecast, reflecting a combination of fiscal consolidation, poor export performance, and increasingly so, low confidence."

"Low growth in the euro core is bad news not only on its own, but is clearly bad news for euro periphery countries which depends very much on the core," Blanchard noted.

Meanwhile, "institutional progress" in the eurozone, such as steps to create a so-called banking union and help from the European Central Bank" is not enough."

"The interest rates facing borrowers in periphery countries are still too high to secure the recovery, and there is a need for further and urgent measures to strengthen banks without weakening the sovereigns," Blanchard added.

That sense of urgency is not felt in Berlin, where the finance minister recently said a change in the EU treaties would be needed to set up institutions dealing with the bankruptcy of banks without tapping taxpayers' money.

A treaty change usually means years of wrangling and can be vetoed by one member state.

Eurozone recession to continue in 2013

The eurozone economy will shrink by a further 0.3 per cent in 2013, the European Commission has said. The bloc will have to wait until 2014 before seeing economic growth.

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After late-night talks, the Eurogroup agreed on a €15bn disbursement and debt relief measures for Greece, while setting out a tight monitoring when the bailout ends in August.

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The risks behind the 'green bond' boom

The EU should not overuse the financial system in order to achieve environmental goals, or it risks the emergence of a green bond bubble which would be detrimental to the financial sector and hinder the achievement of climate targets.

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Eurozone needs institutional reform

Both the examples of Greece and Italy test the limits of a system with inherent weaknesses that feeds internal gaps, strengthens deficits and debts in the European South, and surpluses in the European North respectively.

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