Europe Needs Comprehensive Action to Revive Growth

High unemployment, weak growth undermining stability in Europe

Structural reform agenda could boost GDP by 4 ½ percent over five years, help rebalancing within the euro area

Weak competitiveness, recession in Southern Europe calls for additional policies to reenergize growth

Policymakers in Europe have taken unprecedented actions in recent months to stave off economic and financial troubles, the IMF said. Countries are reducing government debts and deficits, and capital is being provided to weak banks.

Risks have been reduced by a strengthening of the euro area’s anti-crisis firewall, lending by the European Central Bank, and the introduction of the new fiscal compact.

But with the recession continuing, and unemployment high and on the rise in many countries, policymakers need to do more, the IMF said.

In a new paper analyzing the problem of low growth in Europe, staff from the International Monetary Fund said both long-term and short-term solutions are needed. Because structural reforms deliver their potential gradually, product and services market reforms, as well as labor market and pension changes, should be implemented without delay.

The analysis shows large-scale reforms could boost GDP by 4½ percent over five years. A quarter of this gain would come from countries coordinating reforms and acting together. This demonstrates the importance of a concerted approach, although each country will need to design its own agenda to tackle specific priorities.

The IMF said half of these gains, roughly 2¼ percent, could come from product and service market reforms, underlining the importance of tackling vested interests in sectors such as distribution and regulated professions. The North should focus on increasing labor participation and improve services efficiency, while the South urgently needs better functioning labor markets.

Fostering growth now

The IMF said policymakers need to take a two-pronged approach to boosting growth.

“Structural reforms should be implemented now to anchor medium-term growth prospects,” said Rodrigo Valdés, a deputy director in the IMF’s European Department, who led the team that produced the analysis. “But these reforms need to be complemented to sufficiently...