Brexit fallout: Euro area at critical juncture, says IMF

The IMF says a slowdown in global growth could also undermine the EU recovery and raise the likelihood of stagnation, the fund said.

The International Monetary Fund on Friday warned that Brexit is likely to lead to persistent uncertainty regarding the United Kingdom's new status vis-à-vis the European Union and said the euro area is at a critical juncture with weak medium-term outlook.
The Washington-based fund said in a statement that collective action was needed for further integration.
"Recovery in the euro area has strengthened, but the medium-term outlook remains weak and is endangered by a lack of collective action to address common challenges. Members must rebuild faith in the monetary union," the IMF said in its latest review of the currency union.
"The euro area is at a critical juncture. The progress made during the acute phase of the crisis and the recovery should not lead to complacency about the underlying challenges. Policymakers should seize this moment to reverse the rising tide of Euroscepticism and strengthen the monetary union by acting together. Muddling through is increasingly untenable," said Mahmood Pradhan, mission chief for the euro area.
The fragile recovery that started in the euro area in 2014 has strengthened on account of consumer spending as more people find jobs, lower oil prices, a neutral fiscal stance, and accommodative monetary policy.
However, medium-term growth prospects remain less bright. "Inflation remains too low, and weak investment, still high unemployment, and the aging of the population will continue to hurt productivity, raising the risk of stagnation," said Pradhan.
The subdued economic outlook is exacerbated by rising political risk in the euro area and the European Union, it said. "Growing Euroscepticism has led to stark political divisions, which hinder a collective will to take crucial decisions for a stronger union - to deal with the refugee surge or address security concerns, for example. The recent United Kingdom referendum is likely to lead to persistent uncertainty regarding its new status vis-à-vis the EU."
The IMF's views on Brexit's impact on UK-EU ties come amid widespread debate on its ramification vis-a-vis its ties with the Arab Gulf region. Most economists argue that bilateral trading landscape between the GCC and the UK can only improve in the aftermath of Brexit.
"The exit will especially be favourable for the UAE, which is more than hopeful of finally striking a trade agreement with Britain in the absence of a long, elusive EU free trade pact," they argued. The EU has been unable to reach a free trade agreement with the GCC, despite negotiations going back to 1988.
The IMF said a slowdown in global growth could also undermine the EU recovery and raise the likelihood of stagnation, the fund said. "Unless collective problems are resolved, the euro area is likely to suffer repeated bouts of economic and political instability leading to crises of confidence and economic setbacks."
The EU should redouble efforts to ensure the benefits of economic integration and thus rebuild flagging faith in the monetary union, it said. "Countries should rapidly integrate refugees into their labour markets, while the block should reform its common border and asylum policy to protect social cohesion and preserve the single market. Help business and employment."
To counter the risk of stagnation, the report calls for a big push on structural reforms to improve the business climate and employment as incomplete reforms hold back investment and lower growth potential.
Easier access to the professional and retail service sectors, more efficient public administrations and stronger insolvency regimes encourage investment and bolster the impact of labour market reforms. A fully functional single market in services, energy, transport, digital commerce and free trade agreements can open up markets and enhance productivity by allowing firms to scale up.
Shrinking the cost of hiring workers and expanding cost effective active labour market policies can draw more workers into the workforce, the IMF said. "The recovery is an opportune time to commit to reducing excessive protection for workers on regular contracts and overly generous financial disincentives for entering the labour market as these distortions keep unemployment too high for too long."
- issacjohn@khaleejtimes.com