The IMF said today that the euro zone's bid to spur economic momentum was again flagging as it slashed growth projections for this year and next and warned that the 12-nation bloc faced a 'highly uncertain' future.
The International Monetary Fund, in its twice-yearly World Economic Outlook report, foresaw growth this year of 1.2%, down 0.4 pecentage points from its April projection, and 1.8% in 2006, down 0.5 points from April.
After showing signs of a turnaround in the second half of 2004, the IMF said that the 'tentative expansion in the euro area has faltered once again.' Looking to the future the Fund determined that 'the outlook is highly uncertain' for the eurozone, although it did foresee a gradual pick-up in activity in the second half of 2005.
'The lack of internal dynamism makes the euro area particularly susceptible to external shocks, including higher oil prices, a renewed sharp appreciation of the euro or a rebound in global interest rates,' the report warned.
The IMF added that if euro zone inflation - expected to be limited to 1.8% next year - remained subdued and if a durable recovery failed to materialise the European Central Bank should consider' a reduction in benchmark interest rates.
The fund said that in Germany, the euro zone's largest economy, growth should come to 0.8% this year, a projection unchanged from April, and 1.2% in 2006, down 0.7 points from its earlier forecast. The IMF also shaved its growth forecast for France by 0.5 points to 1.5% this year and by 0.4 points to 1.8% in 2006.
The report noted that Europe's per capita gross domestic product had stagnated at about 70% of that of the US in the past 30 years and said reforming the labour market was critical to the 'central challenge' of boosting potential growth.
In particular, it called for greater flexibility in wage bargaining, reducing incentives to early retirement, a tightening up of social safety net benefits and easier procedures for employers to hire and fire.
Despite a clear need for an economic overhaul at the national level, the IMF said euro zone members were showing 'growing signs of reform fatigue.' It predicted that no fewer than five of the 12 euro zone countries - France, Germany, Greece, Italy and Portugal - were likely to run up public deficits in excess of 3% of output this year, thereby violating a key provision of the 1997 Stability and Growth Pact underpins the euro area.
In Britain, a member of the 25-nation European Union but not the euro zone, growth is forecast to come to 1.9% in 2005, down 0.7 percentage points from the April projection before recovering to 2.2% in 2006. The report found that private consumption in Britain had slowed sharply in the first half of 2005 in the face of higher interest rates, oil price increases and a cooling housing market.
The IMF projected growth of 1.6% in the full European Union this year, down 0.4 points from April and 2.1% in 2006, also down 0.4 points.
