The International Monetary Fund said developments in Greece remain a risk for the euro area and warned that authorities shouldn’t become complacent about the scale of the threat.
In a report on the currency bloc, the Washington-based fund said the recovery is strengthening and risks to the outlook are “more balanced than in recent years.” But it also said the region “remains exposed to vulnerabilities.”
“Directors urged policymakers to use all the available instruments, if needed, to manage contagion risks that might originate from Greece,” the IMF said on Monday after a so- called Article IV mission to assess the economy. “They also highlighted the need to continue enhancing the architecture of the monetary union and European firewalls.”
The report comes as Greece prepares to begin talks with creditors on a new bailout agreement. The IMF said that while market reaction to the reform package was “broadly positive,” further episodes of “significant uncertainty and volatility arising from the situation cannot be ruled out.”
Mahmood Pradhan, deputy director of the IMF’s European Department, said it’s in “everyone’s interest for negotiations to proceed at a rapid way and conclude in a fruitful way.”
While the ECB has the tools to limit any short-term contagion from Greece, Pradhan said the currency union needs better buffers in the longer term. He noted the need to complete the banking union and create a common fiscal backstop for banks.
The IMF said the euro region will grow 1.5 percent this year and 1.7 percent in 2016 as the economy benefits from a favorable exchange rate, lower oil prices and European Central Bank stimulus. Inflation will remain close to zero this year before accelerating to 1.1 percent. Pradhan said that, given the inflation outlook, the ECB will have to continue QE beyond September 2016.
In addition to Greece, the fund sees downside risks from low inflation and a slowdown in emerging markets. It said the medium-term outlook is subdued, citing a “chronic” lack of demand and weak productivity. It urged the region to speed up structural reforms and continue to clean up bank balance sheets to encourage lending and investment.