The Eurozone is recovering at a strong pace, the International Monetary Fund said in an analysis released today, although it warns that many challenges lie ahead.
Economic policies in the euro area have strongly supported household incomes and protected corporate balance sheets. High levels of vaccination and increasing adaptation to the pandemic have also helped drive a strong economic recovery.
As the IMF points out, the challenge now is to coordinate the normalization of economic policy in view of the growing uncertainty that arises from both the evolution of the pandemic and the continuing effects of the coronavirus crisis, as well as the increased geopolitical tensions.
Flexibility will be key, as policies become increasingly targeted to reduce a lasting impact and mitigate a potential increase in inequality and poverty.
“Once the expansion is in full swing, the Fund adds, countries in particular will need to reduce their debt.” In this context, credible plans to achieve this should be announced from now on.
In addition, the IMF notes that the European Union’s fiscal rules need to be reformed, including the evaluation of an EU climate fund.
For inflation, the Fund states that based on the baseline scenario, medium-term inflation dynamics are expected to remain weak. However, the upside risks have clearly increased and the European Central Bank should be prepared to adjust its course as needed.
Some euro area countries could also tighten their macro-prudential stance, given the higher valuations of some assets, especially in the real estate markets.
On the labor market, the IMF notes that it has recovered rapidly, but unevenly, in all areas. In this context, it states that policies should facilitate the redeployment of the workforce and protect vulnerable individuals, which includes upgrading skills and upgrading employees, the use of subsidies and the strengthening of targeted safety nets.
Finally, it notes that the structural reforms and high-impact investments envisaged in the European Union Next Generation package are vital to enhancing resilience, supporting green and digital transitions and stimulating potential growth.
Source: Capital
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