The Euro area crisis has reached a “critical stage” and member nations must make a “strong commitment” to the shared currency to stop the plunge in investor confidence, the IMF said in a report that recommends issuing common debt as one solution.
“Despite extraordinary policy actions, bank and sovereign markets in many parts of the Euro area remain under acute stress, raising questions about the viability of the monetary union itself,” the multilateral organization said in a report on Thursday.
“The financial and economic environment continues to deteriorate. Investors are withholding funding from member states most in need, moving capital to safe havens and driving risk premiums to new records.”
While monetary policy doesn’t offer a “lasting solution,” falling inflation gives the European Central Bank room to ease policy rates and signal a “commitment to a more accommodative stance for a prolonged period,” the report said.
Europe’s monetary system needs a closer union of its banks and more fiscal integration to “arrest the decline in confidence engulfing the region,” the IMF said. A “strong commitment” to the monetary union would restore faith in the shared currency, the organization said.
“The immediate priority is concrete action toward a banking union for the Euro area,” the IMF report said. “The proposed EU framework for harmonized national bank resolution processes is a necessary first step. But it needs to go further. A deposit guarantee scheme needs to be established at the regional level to help break the links between domestic banks and their sovereigns, and support depositor confidence.”
“Introduction of a limited form of common debt, with appropriate governance safeguards, can provide an intermediate step towards fiscal integration and risk-sharing” said the IMF.
If necessary, unconventional policy measures should be used, the IMF said, and the central bank should consider non- standard measures such “some form of quantitative easing” or re-activating the Securities Markets Program.