The Strategist

Europe is missing opportunities for reforms

05/16/2018 - 11:45

The International Monetary Fund (IMF) noted strong economic growth in Europe, mainly driven by domestic demand. At that, the organization warned that governments do not use favorable conditions to reduce their debts and implement reforms. This is reported by Reuters.

Rock Cohen via flickr
Rock Cohen via flickr
The IMF predicts that growth in European advanced economies, mainly in the euro area, will slow to 2.3% in 2018 from 2.4% in 2017. In 2019, the growth is expected to fall to 2%.

In general, economic growth in Europe will slow from 2.8% in 2017 to 2.6% in 2018 and 2.2% in 2019, according to the IMF.

"The growth can be explained by domestic demand. Lending growth has finally accelerated, which helps to restore profitability of European banks. Although leading indicators have recently started to decline, they are still at a high level," the fund said.

At the same time, the fund pointed to insufficient efforts on budget adjustment and structural reforms, "despite good times."

"Inflation and wage growth remain restrained in most advanced economies and are projected to gain momentum only gradually, given the weakness of labor markets," the fund warned.

"As short-term economic prospects continue to improve, medium-term prospects are less than welcome. Policymakers should take advantage of the moment to restore space for fiscal maneuver and promote reforms to increase growth potential," the IMF said.

"Automatic stabilizers and fiscal incentives can be deployed again if the downside risks materialize, and stabilizing and reducing public debt will help countries better cope with pressure of rising spending on pensions and healthcare," the fund said. 

The IMF also pointed out that strong economic growth provided an opportunity for a more rapid deepening of the euro zone's economic integration, primarily due to completion of creation of the banking union.

As the UK, a major financial center, will withdraw from the EU in March 2019, the bloc should accelerate formation of a capital markets union, harmonize insolvency laws and protect cross-border investors' rights, the IMF said.

Earlier this month the European Commission also said that economic growth in the euro area, having peaked in 2017, will slow in 2018 and 2019. The Commission retained estimates of the GDP growth in the euro zone in 2018 and 2019 at the level of 2.3% and 2%, respectively.

Eurostat data showed on Tuesday that economic growth in the euro area slowed in the first quarter. The GDP of 19 eurozone countries increased by 0.4% compared with the previous quarter. Growth relative to January-March 2017 was 2.5%. In the fourth quarter of 2017, the eurozone's GDP grew by 0.7% qoq and by 2.8% yoy.