Situation of the euro zone: "What has been done is unprecedented"

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The head of the International Monetary Fund (IMF) is full of praise.

"What has been done is unprecedented," said Kristalina Georgieva on Monday at the presentation of an IMF report on the economic and financial policy of the euro zone.

Of course, the focus was on the economic crisis and how to fight it.

"Both the scope and the speed deserve praise."

But she seems to be aware that European politicians run the risk of resting on what has been achieved.

And so she then made some clear demands on them.

The downward trend intensified as a result of the second corona wave

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Countries should gradually prepare for the time after the end of the pandemic.

The reconstruction fund will play a key role in this, but the euro zone should now discuss fundamental reforms and, very explicitly, the existing debt limits.

Both the monetary policy reaction of the ECB and the aid from the governments at national and EU level cushioned the crisis and, according to the IMF, promoted a strong recovery in the third quarter.

However, the downward trend intensified again as a result of the second wave of the pandemic.

As a result, the support measures would have to be maintained longer than initially thought.

Reducing this support too soon would jeopardize the recovery.

Source: WORLD infographic

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However, the support should be used in a more targeted manner in the future.

It should primarily benefit those who have been particularly hard hit by the crisis and, on the other hand, those companies that are most likely to prove viable after the end of the pandemic.

Between the lines it says that some will just not make it.

Therefore, "facilitating the redistribution of labor and capital" is also necessary, according to the IMF.

In other words: Companies should not be artificially kept alive that have no chance in the long term, even if this leads to job losses.

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Georgieva even explicitly says that short-time work should be reduced and instead people should be supported in their search for new jobs.

The IMF has great hopes for the reconstruction fund that the EU is planning.

This could "significantly boost the growth of the euro area if it is implemented effectively", the report says.

To do this, however, the hurdles in the adoption of the package would finally have to be overcome and payments made promptly.

"Further delays would affect the prospects for a recovery in the euro area."

However, that is exactly what is currently threatened.

Because Hungary and Poland are blocking an agreement on the EU budget and the special fund, because the other states want to pass a new rule at the same time, according to which individual members can be refused EU funds in the future if they violate the rule of law.

This is particularly aimed at Poland and Hungary.

Ultimately, however, the IMF went on to say, the effectiveness of the reconstruction fund depends not only on the size and the early availability of financial resources.

Rather, according to Georgieva, three points are decisive: the projects funded must be of high quality, EU money should not simply replace domestic funding, and above all, the cash injections should not replace reforms.

Political support for a "central financial capacity"

On the contrary: the IMF demands that the provision of funds be linked to progress in implementing the country-specific reform recommendations of the EU.

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Ultimately, these are much more decisive for strong and lasting growth, and the combination of the two topics can help that the reconstruction fund does not serve as a substitute for necessary reforms, but rather becomes a catalyst.

In addition, a positive experience with the fund could in the long term help to create political support in the member countries for a “central financial capacity”, as the IMF puts it.

Ultimately, this means a common financial policy.

In the IMF's view, this is definitely necessary in order to make the architecture of the euro area stable and maintain it.

But the euro zone should already tackle another reform.

"This could also be an opportune time to reform the EU budget rules," said the IMF.

Specifically, it is about the so-called Stability and Growth Pact.

This stipulates, for example, that the budget deficit of the euro members must not exceed three percent per year and the total debt must not exceed 60 percent of the gross domestic product (GDP).

Few countries still comply with the Maastricht criteria

The Stability and Growth Pact is currently suspended due to the crisis.

EU Heads of State and Government should use this to mandate the Commission to propose fundamental reforms of the rules as part of its budgetary review.

In fact, only very few countries now adhere to the limit of 60 percent of GDP in terms of total debt, including Germany.

While Germany still has the chance of getting below this threshold again in the coming years, this is completely impossible for at least seven countries for decades to come.

At the same time, the other requirements were repeatedly torn from many countries without this having any consequences.

“Reforms should aim to simplify the current rules and make them easier to communicate and enforce,” the IMF calls for.

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