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28th Feb 2024

Eurozone recovering but still at risk of stagnation, warns IMF

  • The eurozone recovery is still 'vulnerable' to economic shocks (Photo: Hannelore Foerster)

The eurozone is on the path to recovery but remains "vulnerable" to economic shocks, the International Monetary Fund has warned in its latest assessment of the currency bloc.

In a report published on Monday (27 July), the Washington-based fund argues despite returning to modest growth in 2015, a chronic lack of demand, weak productivity, and a large volume of non-performing loans on bank balance sheets, mean the eurozone’s economic future remains bleak.

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“Several factors cloud the outlook for growth over the next five years,” said Mahmood Pradhan, mission chief for the euro area, in a statement. “These include high unemployment, especially among the youth; large corporate debt; and, rising non-performing loans (NPLs) in the banking system.”

“A moderate shock to confidence—whether from lower expected future growth or heightened geopolitical tensions—could tip the block into prolonged stagnation,” Pradhan added.

A fall in the oil price, and monetary easing by the European Central Bank which has, in turn, weakened the euro, have been the main factors driving the recovery.

In March, the Frankfurt-based bank began to purchase €60 billion of bonds per month as part of an unprecedented quantitative easing programme (QE) set to run until September 2016, and the decision to pump a total of €1.14 trillion into the eurozone economy has helped raise economic confidence across the eurozone. It has also nudged the bloc out of a three month period of deflation at the start of the year.

The eurozone economy grew by 0.4 percent in the first three months of 2015 on the back of stronger-than-expected growth in France and Italy, while the European Commission, which has raised its growth forecast for the year to 1.5 percent, described the “brightest spring in several years” for the European economy.

Of the eurozone’s major countries, Germany continues to grow slightly above 1.5 percent. Meanwhile, Italy is emerging from three years of recession, and the French economy has returned to growth after two years of stagnation.

However, a 1.5 percent growth rate is still far short of what is needed to make a significant dent in the bloc’s 11 percent jobless rate, while unemployment in the south Mediterranean countries is between three and five times higher than in Germany, Austria and the Netherlands.

The report also urges France and Portugal to save interest windfalls from quantitative easing to pay down debt, while calling on Germany, which has been criticised by the European Commission over its relatively low wages and large export surplus, to use the gains to increase investment.

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