Brussels, 17/04/2012 (Agence Europe) -The eurozone will be in recession all this year, according to updated economic forecasts published by the International Monetary Fund (IMF) on Tuesday 17 April 2012, ahead of the AGMs of the World Bank and IMF. The IMF expects eurozone GDP to shrink by 0.3% in 2012, slightly more than forecast in January. It says: “The recession is expected to be shallow and short-lived in many economies. In contrast, in Greece and Portugal, where adjustment under joint EU-IMF programs continues, and in Italy and Spain, where yield spreads remain elevated despite stepped-up fiscal efforts, the recessions will be deeper and recovery is expected to start only in 2013.” The economies of Italy and Spain, two countries in the money markets' firing line, are expected to shrink by 1.9% and 1.8% respectively.
The IMF says that the top priority for Europe is to prevent a new escalation of the sovereign debt crisis by dealing with the underlying causes. Budget consolidation is an obvious priority, it says, although some debt reduction targets may need to be adjusted in line with the situation in the real economy. Spain's aim of cutting its deficit from 8.5% to 5.3% of GDP is described as “appropriate”, although it should have dealt with the impact of low growth at an earlier stage. Countries with strong economies, like Germany, could slow down the process at which they clean up the public purse by letting automatic stabilisers take effect, says the IMF, adding that the ECB should continue its adjustment policies and could cut its leading interest rates and its non-traditional policy of injecting massive amounts of capital into banks in the form of cheap loans. The IMF says there is an urgent need for structural reforms in Europe, particularly of the labour market, to help make European economies more competitive.
Firewall. Next weekend, members of the IMF will be examining whether the eurozone has provided a great enough firewall to bail out struggling countries (€400bn is currently being discussed). The IMF welcomes the Eurogroup's decision to combine the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) to create a bailout capacity of €700bn (see EUROPE 10586). The IMF calls for the creation of a European body with the power to intervene to prevent banks from deleveraging too fast and says that it would be a good idea to ensure greater pooling of budget risks among countries, by means of a stronger ESM, for example. (MB/transl.fl)