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The 17-country euro region needs a mix of in-depth reforms ranging from labor markets to pension systems, in combination with short-term monetary and fiscal support, according to International Monetary Fund staff.
“Fostering growth is always important; in the euro area it has become urgent,” staff from the IMF European department said in a report released today. “Attaining higher and more sustainable growth, while containing risks along the path to recovery, is central for a durable solution to the stress observed in the last few years.”
The European financial crisis deepened and enveloped Spain, raising pressure on German Chancellor Angela Merkel at a meeting of world leaders in Los Cabos, Mexico, to shift her stance on measures to shield the global economy.
The IMF staff estimates that overhauling labor and product markets as well as pensions could boost euro-area output by 4.5 percent over the next five years. At the same time, such measures take time to show their impact, and risks to the region’s stability also call for more immediate measures, according to the report.
“It is important that this point not be dismissed as yet another call for stimulus,” the staff wrote. “Rather, it is consistent with fiscal consolidation proceeding rapidly where market pressures are severe, and gradually elsewhere.”
“Monetary policy should also remain supportive,” they added.
The report also recommends that nominal wages be restrained in the south of Europe while the northern countries should let wages rise somewhat.
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