Jul 19 2012
“The euro area crisis has reached a new and critical stage,” the IMF said in a report on the state of eurozone policy published on Wednesday.
“Despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself,” the report added.
The IMF urged the European Central Bank to play a bigger role in fighting the debt crisis through more rate cuts, purchasing government debts and fund banks.
According to the report there is a 25 percent risk of consumer price deflation before 2014.
Deflation, a destructive decline in prices that can be extremely difficult to reverse, would make it even harder for countries like Greece, Italy and Spain to get government debt under control, as falling prices and wages would further depress tax receipts.
The risk of deflation was low in the faster-growing economies but “significant in the periphery”.
The IMF once again criticized European leaders for the way they have handled the crisis, saying “The deepening of the crisis suggests that its root causes remain unaddressed”.
The international organization also warned that a worsening of the crisis would have a big impact on neighboring European countries “and the rest of the world”.
However, the IMF urged Europe’s leaders to move toward a more monetary and banking union backed by fiscal integration and “more risk sharing”.
Various eurozone member states, including Greece, Spain and Italy, have been struggling with deep economic woes since the bloc’s financial crisis began roughly five years ago.
There are worries that more delays in resolving the eurozone debt crisis, which began in Greece in late 2009 and infected Italy, Spain and France last year, could push not only Europe but also much of the rest of the developed world back into recession.