The International Monetary Fund warned that Europe’s debt crisis has the potential to crush the otherwise positive economic outlook for the region unless policy makers step up efforts to resolve it.
“A broadly sound recovery continues, but the sovereign crisis in the periphery threatens to overwhelm this favorable outlook, and much remains to be done to secure a dynamic and resilient monetary union,” the Washington-based fund said in its concluding statement on euro-area policies today.
“Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers.”
The fund said policy makers should scale up Europe’s rescue fund and extend its potential uses “to secondary market purposes and term funding guarantees.” It also said it’s “essential to bring the unproductive debate about debt re-profiling or restructuring to closure quickly.”
European finance ministers said last night further aid for Greece, which needs a second bailout, hinged on embattled Prime Minister George Papandreou delivering budget cuts in the face of domestic opposition. Ireland and Portugal followed Greece in obtaining emergency loans in the past year.
The IMF said Europe needs a signal that member countries “will do whatever it takes to safeguard the stability of the euro area.”
The fund also advised the European Central Bank, which is poised to raise interest rates again in July, to normalize policy only “gradually.” Moving cautiously will help “limit stress from higher interest rates that could be felt in the periphery,” it said.
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