Tuesday

11th Aug 2020

Eurozone in danger of repeating Japanese stagnation, IMF chief warns

  • Lagarde: the eurozone is in danger of following Japanese stagnation (Photo: International Monetary Fund)

International Monetary Fund boss Christine Lagarde has warned that the eurozone risks following Japan and falling into a prolonged cycle of recession and stagnation.

Speaking on Thursday (9 October) ahead of the IMF's annual meeting in Washington DC, Lagarde said: “We have also alerted to the risk of recession in the eurozone", putting the likelihood of a drop in output at "between 35-40%, which is not insignificant".

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  • (Photo: World Economic Forum)

“We are not saying that the eurozone is heading towards recession, but we are saying that there is a serious risk of that happening if nothing is done,” said Lagarde, adding that “in advanced countries, the recovery is being driven by the US and the UK. The eurozone and Japan are lagging behind”.

The eurozone economy flat-lined in the second quarter of 2014, with negative growth rates recorded in Germany and Italy.

Statistics published by German authorities on Thursday revealed that the country's exports fell by 5.8 percent in August, the largest monthly fall since 2009, raising the prospect of Germany falling into a technical recession.

However, despite faltering exports and low business confidence, Germany still recorded a €17.5 billion surplus.

In a nod to this, Lagarde indicated that surplus countries should invest and consume more to stimulate growth, noting that “if the right policies are decided, if both surplus and deficit countries do what they have to, recession is avoidable”.

In response, German finance minister Wolfgang Schauelbe told reporters that growth would not be "achieved by writing checks".

For his part, ECB chief Mario Draghi stated that the European economy would not recover without painful structural reforms.

Speaking at the Brookings Institute, a think tank in Washington DC, Draghi said: "I cannot see any way out of the crisis unless we create more confidence in the future potential of our economies".

"All too often has reform been postponed in bad times…and then forgotten in good times," he said.

The ECB plans to buy bank securities worth up to €1 trillion between now and the end of the year, as it steps up its intervention in the financial markets to stimulate higher lending to businesses.

Last month, the Frankfurt-based bank launched its Targeted Longer-Term Refinancing Operations (TLTRO) programme, which offers cheap four year loans to banks who increase their lending to small businesses.

At the first auction of the programme last month, lenders borrowed just €82.6 billion from a facility worth up to €400 billion.

Schaeuble and Bundesbank chief Jens Weidmann have complained that the bank is taking on too much risk by loosening its rules on the asset quality it will accept as collateral.

They are also uncomfortable at the prospect - which the ECB has not ruled out - of the bank itself buying government bonds.

Draghi stated that the bank had "acted aggressively", and had changed its strategy from being "predominantly founded on passive provision of central bank credit to a more active and controlled management of our balance sheet".

The ECB will also later this month publish the results of its 'stress tests', which assess whether banks would be able to cope with future economic crises.

According to Draghi, European banks have strengthened their balance sheets by €203 billion since summer last year.

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