On Friday 16 June, the International Monetary Fund (IMF) published its concluding statement on the 2023 mission on common policies for EU Member States. The financial institution notes that the euro area economy has proved resilient, despite Russia’s invasion of Ukraine, but also stresses that uncertainty remains high in terms of growth and inflation.
“The economy entered a mild technical recession at the start of 2023 and economic activity will only pick up very gradually in the future. Inflation has started to come down from historically high levels, but it remains well above the target set”, commented IMF President Kristalina Georgieva.
The IMF believes that monetary policy in the euro area should continue to tighten in order to bring inflation back in line with the 2% target. According to the financial institution, this situation would justify a tight fiscal policy stance in 2023-2024. This would reduce overall demand, which would ease the upward pressure on interest rates and thus reduce the risk of financial market disruptions.
According to IMF projections, euro area public debt, which rose sharply in 2020, is likely to remain well above pre-Covid-19 projections over the forecast period. On this point, the IMF believes that the European Commission’s legislative proposal on economic governance reform (see EUROPE 13203/2) “would appropriately promote a differentiated, risk-based medium-term fiscal adjustment”, reports the IMF.
Nevertheless, the institution insists that this framework should be implemented with caution. “The possibility to extend adjustment periods in return for growth-enhancing reforms and investment is positive but relying on overly optimistic growth estimates must be avoided. In this context, an independent European fiscal council could add credibility to the process”, comments the report.
The IMF’s concluding statement also recommends that supervisory authorities continue to assess banks’ exposure to interest rate, funding, liquidity and credit risks, particularly those related to real estate. The financial institution’s concluding statement also stresses the need to “fully implement Basel III and make significant progress on the Banking Union and Capital Markets Union”. This last point is one of the priorities of the Commission, which would like to see all related matters completed before the end of the parliamentary term in 2024 (see EUROPE 13172/8).
In terms of growth, the IMF is estimating there will be a gradual recovery in 2023 and 2024 in the euro area, thanks to “a slow recovery in real incomes, a further easing of supply constraints, and firmer external demand”. However, production is likely to remain below the trend seen before the war in Ukraine for a prolonged period, “given the costs of adjusting to persistently higher energy prices”, argues the International Monetary Fund. (Original version in French by Thomas Mangin)