–EMU Made Insufficient Progress on Budgetary Discipline
–ECB Mon Pol Can Remain Low, Inflation to Stay Low For Next Two Years

By Heather Scott

WASHINGTON (MNI) – Euro area governments must take the immediate
action necessary to allow the monetary union to function, addressing in
particular unsustainable fiscal policies and lack of discipline, the
International Monetary Fund said Monday.

In a statement following discussions with euro area countries as
part of the annual Article IV economic review, the IMF said the current
crisis is the result of unsustainable policies and failure to address
differences in performance and policy behavior in members.

“Policymakers need to take decisive action to complete the project
of monetary union,” the IMF said. “The current euro area crisis results
from fiscally unsustainable policies in some countries, delayed repair
of the financial system, insufficient progress in establishing the
discipline and flexibility needed for a smooth functioning of the
monetary union, and deficient governance of the euro area.

“Consequently, divergences in economic performance have been
allowed to fester, building up imbalances and leading to the recent
dramatic wakeup call from markets,” the IMF said.

Though praising the decisive, rapid crisis response, the IMF said
the euro area governments still must take steps to address the issues
that led to the crisis, including fiscal sustainability,
country-specific structural policies to spur growth, and accelerating
restructuring of the financial system.

The EMU also must strengthen governance, with particular focus on
“enforcing budgetary discipline,” the IMF said.

On the economic outlook the report noted that even before the
recent crisis “growth in the euro area was expected to be moderate and
uneven, marked by high and persistent unemployment and subdued
investment.”

Monetary policy can remain low since inflation is expected to
remain contained for the next two years, and the IMF said “Once systemic
liquidity conditions return to normal, the ECB can resume its gradual
exit from its non-standard policy support to avoid distorting market
mechanisms and reducing incentives for weak banks to restructure.”

** Market News International Washington Bureau: 202-371-2121 **

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