July 22, 2010
Euro-area growth is expected to slog along at less than a 2% pace through 2012, the International Monetary Fund forecast, as many of the region's countries focus on getting their debt problems under control.
The IMF said there were three major areas that needed to be addressed to establish a durable recovery: tackling weaknesses in the banking sector, implementing ambitious fiscal consolidation plans, and moving ahead with fundamental structural reforms such as entitlement programs and labor markets.
After the 16-nation euro zone sharply expanded its overall fiscal deficit in 2009 to fight the global recession, the IMF forecast that euro zone would take a "neutral aggregate fiscal stance" in 2010, and would reduce its deficit somewhat over the following two years. The tighter fiscal stance would limit growth, the IMF said, but was necessary to stabilize the euro zone's debt.
The Greek financial crisis of earlier this year, with its threat of sovereign debt default, has accelerated the effort by other heavily indebted euro zone nations to limit spending "The crisis management measures are expected to keep the sovereign crisis in check," the IMF staff reported. "Yet weakened confidence and the drag from fiscal adjustment" will limit potential growth.
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