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IMF: Europe's still in the dumps

By Howard Schneider

The International Monetary Fund this morning released its latest review of the eurozone economy, a collection of 16 countries that, judging from the report's conclusions, are becoming the continent's new Brothers Grimm.

Growth is slow -- and at risk of getting slower because bank credit has dried up. The banks themselves are undercapitalized and far too dependent on government support. Core prices are falling, raising the risk of a dangerous deflationary spiral. The entire project of the monetary union needs a full overhaul so that countries can be forced by a central authority to keep their budgets in line -- so that near-broke countries such as Greece look a bit more like Germany, and that tightwad Germany spends a bit more freely to support neighbors like Greece.

The project is a complicated one: The architects of the common euro currency knew going into the venture that they were creating a union that was only half-formed. The 16 countries share a central bank and a common monetary policy. But they control their own fiscal affairs and set their own rules when it comes, for example, to labor markets -- a fact that has prevented the type of labor mobility and wage adjustment considered necessary for an "optimal currency union."

The IMF, however, is never shy on dishing out tough love. Typical of the report's language was this staff appraisal: "The currency crisis results from unsustainable policies in some countries, delayed repair of the financial system, insufficient progress in establishing the discipline and flexibility needed for a smooth functioning of the monetary union, and deficient governance of the euro area."

The agency was also skeptical -- as have been many analysts -- about the thoroughness of stress tests currently being performed on 91 banks across Europe to see whether they will be able to weather another financial shock. In a conference call with reporters, Luc Everaert, assistant director of the IMF's European Department, said the fund will be looking closely at the release of the test results Friday to see what they do and don't prove.

"For Friday, what is essential is that we see broad coverage, scenarios that are severe but plausible, and it is going to be very important the they are clear plans" for raising new capital for banks that are judged to be weak, Everaert said.

By Howard Schneider  |  July 21, 2010; 1:29 PM ET
 
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Comments

IMF. Not more than a year for everybody to see how wrong your approach is. Only speaking about markets rationality, the "terrible" danger of the debt when we are in the context of a depression and giving worse figures every day any country is following your advice. Ireland comedemned already for dozens of years. Every "high" debtor country in the same way because actions tu curb the debt you are promoting. You are really the danger for Europe. Your advice has more probabilites to fail than to be any success. Meanwhile trying to sell the "only truth".

Posted by: Vercinget333 | July 21, 2010 2:08 PM | Report abuse

Guess what, I live here in Europe and I'm pretty sure we've got it right and Obama wrong. The reason is as usual that Obama wants Europe and the rest of the world spending to keep up American dollars. Why should we? China looks quite good, and I doubt if they would slag off BP. Libya is one of the places America invests in most, seems they don't want to know about Megrahi apart from what gets votes.
Just google the senators names and add the word SCANDAL.

Posted by: Anonymous | July 21, 2010 2:26 PM | Report abuse

The European banking system is a mix and match of various accountability metrics.

That said..for Spain, Portugal and Greece..there is no way these countries can compete with the Northern tier European countries for many reasons..but, mostly the infrastructure and past dependencies on tourism..and during the past 10 years..construction.

Travel through Spanish major cities and see the towering and empty shells of thousands of apartment unfinished..and unsold. In many instances, Spanish buyers placed substantial deposits to hold their apartment only to loose the deposit and any possibility of completing the sale....hundreds of millions of consumer deposits lost...with little remedies in the court system/

RH/Spain

Posted by: LTC11A | July 21, 2010 4:23 PM | Report abuse

My fellow european. Let's be fair. The USA has an endemic trade deficit because it has been the big demander the last times based on cheap risky credit. We cannot change evidences because partial views. Now the big demander is not so. Turning to China was the dreamed solution. But China is not still fit for such a role in the short-time political actions have to work. They are also the big european, american and japanese production machine trying to offer the best cost for them. We are asking them for rising salaries while also are waiting the so small costs they usually manage. Unable for any clear solution at short term. Chinese culture is not like the amrican one we were living the past times buying german cars. It is not strange that those countries so exports-oriented finally would need to negotiate about rising their internal demand or be the target of logical proteccionism. No easy future for anybody. Both manufacturers and consumers.

Posted by: Vercinget333 | July 21, 2010 7:12 PM | Report abuse

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