IMF urges European Central Bank to cut rates and use non-standard measures to boost lending and growth

The International Monetary Fund (IMF) has said it expects eurozone GDP to contract by 0.6 per cent for a second consecutive year in 2013, before a modest 0.9 per cent expansion in 2013. It also said the European Central Bank should lower its key policy rate and use non-standard tools to boost lending and support growth.

In its latest Article IV report, the IMF praised the substantial collective actions taken to stabilise financial markets, noting that extreme market stresses have subsided. However, markets still remain fragmented along the national borders, borrowing costs for the private sector remain high in the periphery, and unemployment (particularly among the young) remains high.

It made a number of recommendations to the ECB, which would help weaken the euro and encourage lending and growth.

First off, the ECB should consider a new long-term refinancing operation (whereby the ECB finances banks holding illiquid assets to free up money for lending), linking this to new lending to small businesses or the direct buying of private assets.

Directors recognized that the first priority is to restore sound bank balance sheets to revive credit. Immediate steps include full recognition of losses, recapitalization of weak but viable banks, and closure or restructuring of non-viable banks.

In addition, the ECB should consider the possibility of cutting rates and making deposit rates negative, which would discourage saving and support spending and growth. In addition a "strong, centralised Single Resolution Mechanism, with the independent power to trigger resolution and make decisions on burden sharing" must be established.

Some countries, including France and Spain, may also need to have their deficit reduction deadlines extended to avoid a deepening contraction and higher unemployment.

To combat this rising unemployment, the IMF urged greater flexibility, including the removal of barriers to certain protected professions. It expects French unemployment to continue to rise, despite Hollande's promises it will improve.

(Percent change)
Projections 1/
Demand and supply
Real GDP21.5-0.6-
Private consumption10.2-1.3-
Public consumption0.8-0.1-0.4-0.2-0.1-0.1
Resource Utilisation
Potential GDP0.
Domestic Demand1.30.5-2.2-
Foreign balance0.
Unemployment rate10.110.211.412.312.412.1
Consumer prices1.
Interest rates
EURIBOR 3-month offered rate0.
10-year bond yield3.
Exchange Rates
U.S. dollar per euro1.331.391.31.3
Nominal effective rate (2000=100)103.2104.299.7103.1
Real effective rate (2000=100)95.39590.392.2

Sources: IMF, World Economic Outlook, Global Data Source, DataStream, and Eurostat