Luxembourg, 20/06/2014 (Agence Europe) - The International Monetary Fund (IMF) says that the eurozone has made progress in its return to growth but the green shoots of recovery are not yet robust enough and inflation remains stubbornly low. It therefore recommends quantitative easing of European Central Bank (ECB) monetary policy through a massive sovereign debt buy-up.
The lowering of interest rates and introduction of liquidity announced earlier this month go in the right direction but “more reassuring is the ECB willingness to do more if necessary because inflation is stubbornly low”, said IMF Director General Christine Lagarde on Thursday 19 June when unveiling the latest of the regular IMF reports on the economic situation, which states: “If inflation remains stubbornly low, the ECB should consider a large-scale asset purchase program, primarily of sovereign assets according to the ECB's capital key. This would boost confidence, improve corporate and household balance sheets, and stimulate bank lending. Overall, it holds the potential to have a significant impact on demand and inflation”.
Banking union. The IMF welcomes the progress in moving towards banking union in the eurozone and the ECB's bank asset quality review before it assumes direct supervision of the 128 big eurozone banks in November. In the meantime, the IMF says: “Work needs to continue to establish a common backstop to sever effectively sovereign-bank links. The current planned backstop may prove insufficient to break decisively bank-sovereign links. While the proposal for ESM direct recapitalization is a step in the right direction, as currently envisaged, the thresholds for such support are too high. Overall, centralized resolution resources may not be sufficient to handle stress in large banks.” (MB)