Euro Area policies 2010. Staff Report for the 2010 Article IV Consultation with Member Countries, July 2010

The current economic crisis is a wake-up call for the euro area. The crisis was largely caused by unsustainable policies in some member countries, and has put the spotlight on the deficiency of area-wide mechanisms in disciplining fiscal and structural policies. The sovereign crisis erupted before the euro area’s recovery could gain ground, threatening the financial system and the regional and global recovery.

Despite a strong and far-reaching policy response, market confidence will take time to restore. Facing increasing turmoil, the ECB stepped into the breach with liquidity and credit support aimed at avoiding market instability.

New European financing instruments are being created to assist euro area sovereigns, and several affected member countries took additional fiscal action. While these measures should bolster confidence, further market disruptions cannot be ruled out and will call for strong national policies and use of the newly created instruments as needed.

Now, the underlying problems should be urgently addressed in a well-coordinated manner involving all euro area countries:

+ Fiscal sustainability needs to be established, with ambitious medium- and long-term adjustment plans supplemented by short-term consolidation at a pace tailored to country circumstances;

+ Growth needs to be boosted through swift implementation of structural reforms, which will also have a key role to play in tackling intra-euro area imbalances;

+ Weak parts of the banking system need to be identified and fundamentally restructured;

+ Now is also the time to establish an effective economic and monetary union by strengthening the enforcement of sound fiscal and structural policies and completing the area-wide framework for financial stability.

The authorities broadly concurred with this analysis, but the implementation is, as yet, patchy. Progress is being made on fiscal consolidation, and weak banks are beginning to be tackled, but little is being done to address longstanding structural problems, including entitlement reforms, and true coordination of policymaking remains elusive.

EurActiv, 22.7.10: IMF warns euro zone against austerity side effects http://www.euractiv.com/euro/imf-warns-eurozone-against-austerity-side-effects-news-496536

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