IMF Executive Board Concludes Article IV Consultation on Euro Area Policies

IMF Executive Board Concludes Article IV Consultation on Euro Area Policies
Public Information Notice (PIN) No. 11/91
July 19, 2011

Public Information Notices (PINs) form part of the International Monetary Fund's (IMF) efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Executive Board Assessment

Executive Directors noted the risks that the euro area sovereign debt crisis poses to both the European and the global recoveries, and called for strong policy implementation in the program countries, a more consistent effort across the euro area to restore market confidence, and a significant strengthening of economic governance, building on current efforts.

Directors agreed that growth has rebounded but noted the increasing disparities among member states and the large tail risk from sovereign stresses combined with pockets of financial fragility. They noted that, if these stresses remain contained and the recovery stays on track, planned fiscal consolidation should continue and there would be room for gradually phasing out monetary policy accommodation. However, given the continued tensions in some sovereign markets, Directors saw a need to maintain unconventional monetary support as long as necessary and raise bank capital buffers beyond the requirements of Basel III.

Directors urged a comprehensive and concerted approach for effectively addressing the sovereign debt crisis. Strong implementation of existing commitments should be supported with adequate financing on terms supporting debt sustainability and private sector based solutions to banking problems. At the euro-area level, Directors stressed a number of essential actions. First, they urged a rapid implementation of the commitment to scale up the capacity of the European Financial Stability Facility (EFSF) and supported a more flexible use of the EFSF as a backstop for sovereign and banking problems. Second, Directors called for clarity in the approach to private sector involvement with regard to ongoing programs and in the context of the European Stability Mechanism. And third, they called for immediate measures to strengthen the financial system through adequate capitalization and a strong follow up to the stress-test.

Directors saw the establishment of the ESAs and the ESRB as an opportunity to bolster the economic governance framework by building a strong and harmonized regulatory and supervisory environment for the single financial market. They called for improving institutions for crisis management and resolution, with an agreed burden sharing solution and common backstop. They also saw a need for a flexible macro-prudential toolkit, coordinated by the ESRB to support reciprocity and address home-host coordination.

Directors emphasized the need to push forward with fiscal consolidation and structural reforms. In this context, they welcomed the efforts to strengthen the SGP and improve national fiscal frameworks, coordinate policies, foster structural reform, and reduce imbalances, underscoring that more binding procedures would be helpful. They saw deeper financial and economic integration, including by closing the competitiveness gaps, as a precondition for unleashing the euro area’s growth potential.

Directors concurred with the findings of the spillovers analysis that spillovers could be large if stress in euro-area crisis countries spreads to other members. They emphasized the need to stem contagion through a cohesive and cooperative approach, noting that delays in resolving the crisis could be costly for the euro area and the global economy. Directors also noted that the rest of the world would profit from policies that lift the euro area’s growth potential.

See the entire IMF notice here.