Decisive Action Needed in Europe to Restore Confidence—IMF

Sovereign debt crisis entering “worrisome phase”

When Greece implements commitments, financial support will be there

Call for reforms aimed at improving long-term economic performance

To a large extent, developments in Europe reflect what is happening throughout the world, with a slowdown in global trade and slower growth the United States. But there has also been a softening in consumer spending and a loss of confidence in the markets. The current drive for fiscal consolidation is further dampening growth, he said.

The IMF is projecting growth of 1.6 percent in the euro area in 2011, and 1.1 percent in 2012, with significant differences between countries.

“If things were to stay this way, the economy would simply go through a soft patch. But every time the economy slows down, there is always a risk that the economy will slow down further, and it is that risk that keeps us awake at night,” Borges said September 23 at a press briefing held as part of the World Bank-IMF Annual Meetings. In that context, the IMF has been recommending a nuanced change in policy.

Given the absence of inflationary pressure, the IMF would welcome a more expansionary monetary policy to address downside risks to the outlook. On the fiscal front, some countries have no option but to continue putting their budgets in order. But other countries have more leeway and should allow automatic stabilizers to operate fully, he said.

Addressing the sovereign debt crisis

Europe’s sovereign debt crisis has now entered a different and more worrisome phase. We are seeing the first elements of contagion, with Spain and Italy now paying higher interest rates, Borges said.

As we see deteriorating market sentiment, we hope to stop it before it becomes overwhelming. Decisive action needs to take place, and take place soon.” He called on Europe’s leaders to restore confidence through measures that will convince investors that their investments will be safe and profitable.

Borges noted that some countries have made significant progress in addressing concerns about deficits and debt—progress that markets are too often ignoring. “There is an element of market fear, which to a large extent we consider excessive.” Spain is one such example. Remarkable progress has been achieved in terms of economic policies, although the labor market is still terrible, he said.

As for Italy, it has had problems of growth for more than a decade, but its public accounts have never been as good as...