Tags: IMF | Euro | Zone | Budget | Cuts

IMF Warns Against Half-Hearted Euro Zone Budget Cuts

Monday, 07 Jun 2010 02:49 PM

Delayed or half-hearted budget cuts by vulnerable euro zone countries such as Greece could trigger a further loss of market confidence in the region and a new slide in the 16-nation currency, the International Monetary Fund warned Monday.

The euro has slumped to a new four-year low, trading at under $1.19 for the first time since March 2006, as investors fear that European governments may not be able to repay mounting debt while economic growth remains weak.

In a report on the euro zone economy, the IMF called for indebted nations facing high borrowing costs — such as Greece, Spain, Portugal or Ireland — to push through austerity programs that would curb mounting debt.

"Delayed or half-hearted fiscal consolidation in countries facing high spreads could trigger a further loss of financial market confidence in the fiscal sustainability of some member states, a spike in risk premiums and a sharp depreciation of the euro," it warned.

Countries facing market pressures "have no choice but to adjust forcefully and to prepare contingency plans" in case existing cuts won't bring down their deficits, it said.

Increasing retirement ages and reforming healthcare — which would reduce state costs — should be the type of moves governments need to make to cut spending in the long-term, it said.

The IMF called on governments to take immediate action to balance their budgets, spur growth and accelerate the restructuring of their financial system to overcome "the long-standing problem of anemic growth in the euro area."

It criticized government policies that restrict labor movement — and rules that make it costly to hire and fire workers — saying this will cause new job creation to be "limited during the upswing."

The jobless rate in the region hit a ten-year high of 10.1 percent in April.

The IMF said stronger sanctions are needed to make euro
zone countries comply with the rules — such as national laws forcing them to balance a budget, similar to Germany's "debt brake" which will require the government to limit borrowing.

The fund also said it was "imperative" that governments set up a 750 billion euro ($1 trillion) rescue fund that could bail out any country that risks default.

All 27 EU nations agreed on the fund last month but they have not yet settled details to make it a reality.

It called for euro zone banks that are relying heavily on government support or European Central Bank lending to be "forced to raise additional capital, clean up their balance sheets and establish a viable business model or face restructuring or resolution."

It warned that blanket financial support may need to remain in place for longer than planned to aid the sector.

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Delayed or half-hearted budget cuts by vulnerable euro zone countries such as Greece could trigger a further loss of market confidence in the region and a new slide in the 16-nation currency, the International Monetary Fund warned Monday. The euro has slumped to a new...
IMF,Euro,Zone,Budget,Cuts
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2010-49-07
Monday, 07 Jun 2010 02:49 PM
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