Concerted Action Needed in Eurozone to Revive Growth and Jobs

Healthier, more integrated banking system needed to support recovery, restore confidence

Overcoming structural weaknesses is vital to long-term recovery

Support for demand essential until more comprehensive actions kick in

In its latest annual assessment of the euro area, the IMF said that these actions, if taken in concert, would be mutually reinforcing.

“Over the past year, substantial actions at both the national and euro-wide levels have been taken to combat the crisis," said IMF Managing Director Christine Lagarde. "But despite this progress, the economic recovery remains elusive, unemployment is rising, and uncertainty is high. Additional policy measures are required to fully restore confidence, revive growth, and create jobs."

The IMF emphasized, in particular, steps to repair banks’ balance sheets, complete the banking union, support demand, and advance structural reforms.

Progress to date

The IMF acknowledged the positive impact of measures taken over the past year to combat the crisis, such as implementation of the European Central Bank’s (ECB) Outright Monetary Transactions framework, the completion of the European Stability Mechanism (ESM) firewall, and agreements on program countries. These steps have addressed immediate threats, but financial markets remain fragmented along national borders.

Also, in the face of lingering uncertainty and high debt, households and firms are postponing spending. With unemployment at record highs, especially among young people, the risks of stagnation and long-term damage to potential growth are increasing.

Four priority areas

The IMF assessment thus recommends giving priority to four areas of policy action:

• Restoring the health of banks’ balance sheets. To raise confidence, a credible assessment of the quality of banks’ assets is needed. Such an assessment would quantify capital needs and should be accompanied by a clear plan on how to meet these needs. Where private capital is insufficient, credible backstops—in some cases, the ESM—will be essential to preserve banks’ ability to continue lending.

• Completing the banking union. This would entail expediting reforms already under way, such as adopting the legislation for the Single Supervisory Mechanism and reaching final...