FRANKFURT (MNI) – The International Monetary Fund (IMF) expects
economic growth in Europe to pick up this year and the next, with risks
to the outlook “broadly balanced” even though traditional recovery
drivers are likely to be weaker than usual.

“In the near term, growth will continue to benefit from exports,
fiscal support (including from lagged stimulus measures such as
infrastructure investment), and an upswing in inventories,” the IMF said
in its Regional Economic Outlook published on Tuesday.

Conversely, owing to high unemployment and ongoing credit
constraints noted in the banking sector, consumption and investment
growth is expected to “remain lackluster,” it said.

The IMF confirmed its Eurozone GDP growth forecasts of +1.0% and
+1.5% for 2010 and 2011, respectively, adding that risks to the growth
outlook appear “broadly balanced”.

Downside risks include commodity price shocks that could push
central banks to raise interest rates sooner than expected, “which in
turn would undermine the effectiveness of the macroeconomic stimulus
still in the pipeline and delay the normalization of credit conditions,”
the Fund warned.

The IMF also listed market concerns about Greece’s current fiscal
situation as another downside risk. However, it should be noted that the
IMF report was produced before the EU finance ministers and the IMF
agreed to a joint euro fund worth up to E750 billion to head off any
spread of Greece’s fiscal crisis and before the European Central Bank
announced its intention to purchase government bonds.

“On the positive side, the continued dynamism of activity in the
United States and emerging economies in Asia and Latin America could
boost global trade; the effect of these brighter prospects might
encourage support confidence in more stable growth patterns in the
region,” the IMF added.

The IMF underlined the growing concern relating to the costs of
various intervention programs, especially those on the fiscal side. But
it also warned of the dangers in trying to stabilize public debt in the
near term, “given the risk of a relapse into recession and the magnitude
of the required fiscal retrenchment.”

“However, sustainability indicators are flashing warning signs
about the public debt in most countries, and sizable consolidation
efforts are needed in the medium term,” the report said.

Focusing on the Eurozone, the Fund stressed the importance of
coordinated exit policies.

“Here, existing frameworks like the Excessive Deficit Procedure and
the Stability and Growth Pact can be helpful, for example by serving as
common anchors to medium-term plans for adjustment and exit in line with
the principles endorsed by the G-20,” it said.

“However, the Greek crisis is a powerful reminder of long-standing
gaps in the area’s fiscal architecture,” the Fund added. “Filling those
gaps will require a substantial strengthening of fiscal discipline in
good times and the introduction of procedures to manage crises.”

–Frankfurt bureau tel.: +49-69-720142. Email: frankfurt@marketnews.com

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