Achieving higher productivity & inclusive, sustainable growth requires strengthening single market – IMF on euro area economy
The International Monetary Fund (IMF) has said in its Euro Area Policies: 2024 Annual Consultation-Press Release that the euro area economy has been resilient in the face of multiple, large shocks, including the pandemic, Russia’s gas shut-off, and fallout from the war in Ukraine.
Nonetheless, the Fund said, the adverse shocks have had persistent effects which shape economic prospects.
Energy-intensive industries, in particular, have struggled to adjust to higher input costs and continue to underperform. Despite subdued overall activity, employment growth remains robust.
Inflation has declined significantly from its late2022 peak in response to the ECB’s policy tightening and the decline in commodity prices, the IMF said.
Outlook
The IMF indicated that a modest pickup in growth is projected for 2024, strengthening further in 2025.
This primarily reflects expected stronger consumption on the back of rising real wages and higher investment supported by easing financing conditions, it said.
Inflation is projected to return to target in the second half of 2025.
“The economy is confronting important new challenges, layered on existing ones. Fiscal buffers have diminished while spending pressures are set to increase further. Population aging and subdued productivity growth cloud the medium-term outlook.
“Policy uncertainty can trigger market repricing of sovereign fiscal risks and contribute to higher volatility of asset prices more generally.
“The risk of intensifying geopolitical tensions, further geoeconomic fragmentation, supply chain disruptions, trade disputes, and distortive industrial policies further complicate economic prospects and the policy-making environment,” it said.
Policy priorities
The Fund noted that beyond returning inflation to target and ensuring credible fiscal consolidation in high-debt countries, the euro area must urgently focus on enhancing
innovation and productivity.
Higher growth is essential for creating policy space to tackle the fiscal challenges of aging, the green transition, energy security, and defense.
“Achieving higher productivity and inclusive and sustainable growth requires strengthening the single market, including through the capital markets union; enhancing the EU budget for public goods investment to address shared long-term challenges; and avoiding industrial and trade policies that generate competitive distortions or adverse spillovers.,” it said.
Read the full statement here
