IMF Says Europe Must Plan for Long-Term Risks

Although European economies have experienced a steady upswing in recent years, not enough has been done to prepare for a rainy day, the IMF has said in a fresh outlook. It cited a number of risks to be aware of.

The International Monetary Fund on Monday encouraged European economies to use their relative strength to plan for long-term risks. It said all EU economies were growing, turning the continent into an engine of global trade. “But countries should make some room in their budgets for maneuver so they can keep their economies afloat in worse times,” the latest IMF outlook said, DW reported.

It warned that after recovering from the 2008 financial crisis, member countries still only had “a thin cushion accumulated for a rainy day.” The organization cited weak productivity growth and remaining bad loans as alarming problems still to be dealt with.

“Aging populations, spreading protectionism, geopolitical tensions and export loss because of a downturn in China all add to the risks threatening long-term growth.”

It noted that economies with high public debt including the UK, Belgium, France, Italy, Portugal and Spain needed to reduce their debt load “without jeopardizing the economic uptick.”

The IMF insisted Germany, the Netherlands and Sweden had enough wiggle room in their budgets and should aim to lift growth through higher public investment in infrastructure, housing and the integration of immigrants.

It raised its forecast for EU GDP growth to 2.3% this year, up from its previous prediction of just 1.9%.

Already, Europe’s improved demand is boosting world trade. According to the IMF, Europe’s contribution to the growth of global merchandise imports in 2016-17 is similar to that of China and the US combined. One outlier is the UK, where demand has slowed after the pound’s depreciation lifted inflation and squeezed real incomes, Bloomberg reported.

Europe’s strengthening momentum should help to generate inflation pressure after many developed economies grappled for years with low price growth. Output gaps in the region’s advanced nations are closing, a milestone already largely achieved in emerging Europe, the IMF said.

Although central banks should be ready to gradually withdraw stimulus where wages have accelerated, the IMF cautioned that policy makers should be patient and allow this trend to prove durable.

It added that for the ECB to reach its medium-term inflation objective, stronger economies will have to accept faster inflation rates for some time.