The mounting debt crisis in Europe “threatens to overwhelm” the region’s economic recovery and could have a global impact if it damages larger European countries, the International Monetary Fund warned Monday in an unusually stark criticism of Europe’s policies and policymakers.
Calling for a major overhaul of how the 17 nations that share the euro govern themselves, the IMF said in a paper that the current crisis might end only when the euro zone comes up with a convincing plan to ensure that economically weaker nations will be supported by the stronger ones.
European leaders have spent nearly two years discussing those larger problems, even as they crafted emergency bailout programs for Greece, Ireland and Portugal.
But their efforts have fallen short, the IMF said. With Greece again running out of cash and Europe locked in debate about how to respond, European leaders have focused too much on “unproductive” issues — such as the possible involvement of private bondholders in a rescue plan — rather than on the more important questions of how to better coordinate government budgets and help Europe’s weaker economies become more competitive.
The euro area is threatened by a weak financial system, the IMF said, and a political and regulatory culture that is not allowing labor and capital to flow freely across borders, as it needs to in countries that share a currency.
The result: a “core” of wealthy nations like Germany around whom the policies of the European Central Bank are largely set, and a weaker “periphery” that has fallen out of competitive step.
Europe’s “strong core is pulling ahead of a periphery facing daunting challenges,” the agency said. “Strong policy action by national authorities is a prerequisite, but should be backed by a truly cohesive approach from all euro area stakeholders.
“Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers.”
Read more at The Washington Post.