28 February 2014

IMF: European integration, step by step

The latest issue of the IMF's 'Finance & Development' magazine focuses on Europe's drive towards economic integration — the forces bringing it together and those pushing it apart - with contradictory views on how this can work.

Over 20 million people in the euro area, or 12 per cent of the population, were out of work at the end of 2013, and output was 3 per cent below that at the start of the crisis. “Europe is in a terrible mess", says Oxford University’s Kevin O’Rourke in the March 2014 issue of F&D. O’Rourke sees this as evidence of a dismal policy failure largely due to the limits that monetary union puts on policymaking. He says Europe is now “defined by the constraints it imposes on governments, not by the possibilities it affords them to improve the lives of their people". The solution is either a federal political Europe, or a European Union without a single currency. “If a crisis is inevitable, then it is best to get on with it", he says. [Full article]

But the latest IMF World Economic Outlook Update says the euro area is turning the corner from recession to recovery. Growth is projected to strengthen to 1 per cent in 2014 and 1.4 per cent in 2015, though the recovery will be uneven and countries that have been under stress will see a more modest pickup. High debt, both public and private, and financial fragmentation will hold back domestic demand, while exports should further contribute to growth. Growth in central and Eastern Europe is projected at around 3 percent.

Reza Moghadam, head of the IMF’s European Department looks back at Europe’s experience, and concludes that the commitment to closer ties runs deep. And yet economic, financial, and fiscal integration remains incomplete. That deficiency was the root cause of the euro area’s recent debt crisis and reinforced its severity. The answer, says Moghadam, is more integration, not less.

The global financial crisis exposed weaknesses in the region’s supranational structures and eroded political support for closer ties, writes Moghadam. But integration has yielded substantial benefits for Europe, and 25 years after the fall of the Berlin Wall it continues to be the best way forward for the region.

Moghadam notes that “the nascent recovery in the euro area risks creating complacency—a wrong-headed belief that the crisis is over and integration efforts can be relaxed". Resolution of the crisis calls for stronger institutions underpinning the euro area and a better understanding of how countries affect each other. A more robust euro area will prevent country-specific shocks from spilling over to the rest of the region. “If political will can once again be summoned, further integration coupled with steps to boost growth can create a more durable foundation for prosperity in the region", concludes Moghadam. [Full article]

Press release

Finance & Development magazine

See also IMF video: Growth Prospects and Challenges in the Euro Area

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