IMF Warns Euro-Area Recovery May Slow, Stimulus Still Needed

The euro area is in danger of seeing a slower economic recovery in 2021 than previously expected, and may need more stimulus as a resurgent coronavirus sweeps through the continent, the International Monetary Fund said.

Risks will remain on the downside into the new year and the timing of a rebound will depend on how quickly and effectively a vaccine is rolled out, the fund warned. It said unprecedented policy responses at national and European Union levels have helped cushion the impact of the crisis.

“Unless pandemic dynamics change significantly in the coming months, economic activity is set to recover more gradually than forecast,” the IMF said in a report after talks with euro-zone members on their common policies. Further fiscal support will be needed and governments should “explore options to enhance the current fiscal rules.”

For now, the IMF maintained its estimates of an 8.3% slump in the 19-member euro area this year and a 5.2% economic rebound in 2021.

A slower recovery would be more likely to produce long-term “scarring” that could weigh on the bloc in the future, it warned, adding that tensions between the U.K. and EU over Brexit have increased uncertainty. Britain is due to leave the bloc’s customs area at the end of the month, and no deal on arrangements after that has yet been reached.

Italy and Austria have imposed new lockdowns to contain the spread of the pandemic, while the U.K. is facing a surge of infections and a new variant of the coronavirus that led several nations to tighten restrictions on travel to and from the country. Such events are putting a damper on hopes of a quick recovery even as the first vaccines begin to be distributed.

IMF directors praised the EU’s Next Generation aid package stressing that its effectiveness will hinge on “quick implementation, the quality of spending, and its capacity to catalyze structural reforms.”

The fund also recommended that capital relief and conservation measures for banks be kept until the recovery is well underway.

Regarding inflation, the IMF said “it is expected to only gradually increase and remain below the European Central Bank’s medium-term aim throughout most of the forecast horizon.”

It commended the ECB’s extra monetary stimulus announced this month but cautioned that further support might be needed, especially if downside risks materialize.

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