Full steam ahead with banking union, IMF urges
By Brian Beary in Washington | Tuesday 17 July 2012
The European Union should move ahead promptly with its plans to create a banking union if it wants the euro to survive, the International Monetary Fund (IMF) is saying loud and clear. “I am absolutely for a banking union,” Jose Vinals, the IMF’s financial counsellor and director of monetary and capital markets, said, on 16 July, at a briefing on the IMF’s updated economic forecasts. It was “essential” for the EU’s banks to be supervised in a uniform, centralised manner and for an EU-wide bank resolution process to be established, he said. Vinals warned that the European Central Bank (ECB) may need to give direct capital injections into European banks to stave off the crisis. Commenting on the long-term refinancing operations (LTROs) that the ECB carried out in December 2011, Vinals said they “bought valuable time” but that the LTROs’ beneficial effects “have decreased in recent months”. That was why, he said, EU political leaders needed to quickly put in place a fully-fledged banking union and proceed with deeper fiscal integration.
On the fiscal side, the fund’s appraisal of the EU was broadly positive. The pace at which EU governments were proceeding to reduce their deficit and debt levels was “more or less appropriate,” said Carlo Cottarelli, director of fiscal affairs. He noted that three quarters of the advanced economies would see their deficits decline in 2012, and one third of them would see their debt-to-GDP ratio decline. Germany and Italy, for example, were close to meeting their medium-term goal of having balanced budgets, adjusted for the economic cycle. Cottarelli warned that too much attention was being paid to so-called headline deficit targets (ie not adjusted to the economic cycle) and not enough to ‘structural deficits’ (ie cyclically adjusted). He noted that Italy and Spain were having to pay higher interest rates on sovereign bonds than was justified by their underlying debt and deficit fundamentals. This was due, he said, to lingering doubts about the euro’s overall viability, which was precisely why EU-level action to address the crisis was so important.
US FISCAL CLIFF APPROACHING
Meanwhile, the impending ‘fiscal cliff’ that the United States is approaching, on 31 December, could cause “an enormous shock” to the global economy, warned the IMF’s Economic Counsellor and Director of the Research Department, Olivier Blanchard. If Congress does not take action, drastic spending cuts automatically kick into the US economy on 1 January 2013, which would reduce the US’ budget deficit by 4% of GDP in just one year, said Blanchard. “There is a need for avoiding such a large adjustment,” he said, noting that the IMF would prefer a more modest deficit reduction of 1% of GDP. This alarming situation has been created by the failure of Republican and Democrat lawmakers on Capitol Hill to agree on medium-term tax and spending policies.