The IMF has released its annual report on the eurozone. The 45-page document praises the performance of the ECB’s QE programme so far, but warns it may have to be extended due to uncertainties stemming from Greece.
QE, so far, is said to have “boosted confidence, improved financial conditions, and contributed to a reduction in financial fragmentation.” However, it is also noted that volatility from Greece may require further action. The report notes that the situation in Greece is fluid and potentially subject to further negative developments, meaning that policymakers should be prepared to implement policies to “manage contagion risks.”
The external position of the eurozone is said to
“[P]olicy-makers should stand ready to deploy, and if necessary adapt, the full arsenal of available instruments,” according to the report. “[T]he ECB in particular should ensure that banks continue to have access to ample liquidity and maintain orderly conditions in sovereign debt markets. If financial conditions tighten significantly, the ECB should consider further loosening monetary policy through an expansion of its asset purchase program.”
The report notes that growth in the eurozone has picked up since mid 2014 and continued in 2015, pointing out that “private consumption remained robust, reflecting rising employment and real wages, while fixed investment has expanded,” with growth in Germany at 1.5 percent, while Spain, Italy and France have also seen activity pick up. Very low inflation is also expected to have bottomed out, hovering just above zero this year before rising to 1.1 percent in 2016. Early 2015 saw consumer and business spending pick up, stemming from the trough in oil prices.
The external position of the eurozone is said to have strengthened, with the current account having posted a surplus. The weakening of the euro in 2015 “has been beneficial given the economic cycle,” the IMF says. However, “the currency is now moderately weaker than the level consistent with medium-term fundamentals.” This can be remedied by “a broader reform agenda that strengthens growth and inflation would contribute to a gradual strengthening of the real exchange rate over the medium term,” along with appropriate monetary policy.
It is also pointed out that external imbalances within the eurozone remain, noting that although the current account positions of debtor nations has improved, owing to a lower exchange rate and labour unit costs, “rebalancing has failed to take place among creditor countries with the large current surpluses of Germany and the Netherlands continuing to grow and moving farther away from levels implied by medium-term fundamentals.” Rebalancing will require “addressing excess saving and weak investment in creditor countries, while improving further the competitiveness of debtor countries.”