June 19, 2014 / 6:54 PM / 5 years ago

Euro zone has correct fiscal stance to cut debt, help growth: IMF

LUXEMBOURG (Reuters) - The euro zone’s fiscal stance strikes the right balance between reducing debt and bolstering demand, the International Monetary Fund said in a statement on Thursday.

The International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 18, 2013. REUTERS/Yuri Gripas

The euro zone’s overall government deficit fell to the European Union limit of 3 percent of gross domestic product in 2013 from 6.2 percent in 2010 - the year when it had to bail out Greece for the first time.

The sovereign debt crisis that followed plunged the euro zone into a deep recession. The economy is now recovering slowly and euro zone policymakers are discussing how to balance the reduction of public debts while at the same stimulating growth.

“After several years of consolidation, the overall fiscal stance for the euro area is close to neutral. This strikes the right balance between demand support and debt reduction. But large negative growth surprises should not trigger additional consolidation efforts,” the IMF said.

The IMF noted said the recovery was neither robust nor sufficiently strong and said continued support for demand in the 9.6 trillion-euro economy was vital.

The IMF praised the steps the European Central Bank took in early June to help accelerate dangerously slow inflation, but noted more might be needed if those steps fail.

The ECB became the first major central bank to introduce negative deposit rates - charging banks to park their funds at the central bank overnight. It also offered ultra-cheap four-year loans to boost lending to companies. And ECB President Mario Draghi said the bank was ready to act again if necessary.

“The ECB’s willingness to do more, if necessary, is reassuring. If inflation remains stubbornly low, the ECB should consider a large-scale asset purchase program, primarily of sovereign assets, according to the ECB’s capital key,” it said. Such a policy move, known as quantitative easing, remains available to the ECB.

IMF Managing Director Christine Lagarde, asked to elaborate on her definition of “stubbornly low” explained that stubbornly would apply to a case when the measures already deployed by the ECB would prove ineffective.

Low inflation would be price growth that is way below the ECB target of just below 2 percent. “It seems to us we are currently in that zone,” Lagarde said.

IMF warned that euro zone unemployment, easing only slightly from last summer’s peaks around 12 percent, was still too high. A jobless recovery is a worry for all states as it puts budget expenditure under pressure.

“Much higher growth is needed to bring down unemployment and debt,” the IMF said.

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Reporting By Martin Santa, editing by Jan Strupczewski, Larry King

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