IMF urges Europe to do more to tackle recession

PARIS (Reuters) - Europe should take bolder steps to fix its banks and better coordinate national policies to improve the region’s chances of shaking off recession during the course of 2010, the International Monetary Fund said on Tuesday.

A report from the Washington-based agency, which has provided economic rescue funds for emerging market European countries hit hardest by the global financial crisis, stressed the need for Europe to adopt policies that helped west and east.

“Europe is facing the economic storm of a lifetime and it urgently needs to weatherproof its institutions,” Marek Belka, head of the IMF’s European department, said in prepared remarks on the publication, which he was presenting in Paris.

The report expands on IMF analysis and policy advice, though its call for more interest rate cuts and other less conventional support steps from central banks does not take into account last week’s European Central Bank decision to cut euro zone rates to 1.0 percent and embark on covered bond purchases.

Cut-off date for the text of the publication was April 15, an IMF official said.

The report repeats the macroeconomic forecasts contained in the IMF’s April 22 World Economic Outlook.

It foresees deep recession in 2009 and flat to sub-zero growth for 2010 as a whole despite a pickup that should take place as long as government measures are effective. It sees both advanced and emerging economies in deep contractions in 2009 but the emerging market region returning to growth for 2010 as a whole while advanced economies still struggle, if much less so than this year.

The IMF said fiscal stimulus should continue in 2010 and focus on infrastructure and direct transfers rather than tax breaks and subsidies for companies and consumers.

“Crisis measures, regulatory, and supervisory actions have been unhelpfully diverse especially in Europe’s well-integrated financial sector,” the IMF said.

“But coordination is also at a premium when it comes to macroeconomic policies, where the sustainability of fiscal efforts needs to be secured and support for Emerging Europe systematically stepped up.”

The report and Belka in his accompanying remarks kept up the IMF’s demands for more convincing efforts to clean up the banking system.

“Trust in the financial system has yet to be restored,” he said. The IMF said bolder, coordinated efforts were needed to ensure proper loss recognition and ring fencing of toxic assets at banks.

For emerging economies, “potential debt-servicing difficulties and disruptive exchange rate movements should be pre-empted with the involvement of EU institutions, and of the IMF where needed, by extending currency swap lines for emerging markets and clarifying the road maps for euro adoption,” the report said.

Belka said the region’s deep recession was in line with the trend elsewhere when viewed on a gross domestic product per capita basis.

At a time when markets are clinging to the hope that the worst may already be over, the IMF remained cautious.

“Even assuming more forceful policy actions, the downturn is likely to last until early 2010, and the subsequent recovery is expected to be gradual.

“Inflation is expected to fall to very low levels in many countries, but outright deflation is likely to be avoided,” the IMF said.

“The risks around this overall economic scenario, however, still remain tilted to the downside ... With low inflation, consumers could regain confidence earlier, but continued weak global demand could lengthen and deepen the recession.”

Editing by Ruth Pitchford