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The
International Monetary Fund has warned that the eurozone is in “critical”
danger and there is “a sizable risk” of deflation in the single currency bloc.
“The
euro area crisis has reached a new and critical stage,” the IMF said in a
report on the state of eurozone policy published on Wednesday.
“Despite
major policy actions, financial markets in parts of the region remain under
acute stress, raising questions about the viability of the monetary union
itself,” the report added.
The
IMF urged the European Central Bank to play a bigger role in fighting the debt
crisis through more rate cuts, purchasing government debts and fund banks.
According
to the report there is a 25 percent risk of consumer price deflation before
2014.
Deflation,
a destructive decline in prices that can be extremely difficult to reverse,
would make it even harder for countries like Greece, Italy and Spain to get
government debt under control, as falling prices and wages would further
depress tax receipts.
The
risk of deflation was low in the faster-growing economies but “significant in
the periphery”.
The
IMF once again criticized European leaders for the way they have handled the
crisis, saying “The deepening of the crisis suggests that its root causes
remain unaddressed”.
The
international organization also warned that a worsening of the crisis would
have a big impact on neighbouring European countries “and the rest of the
world”.
However,
the IMF urged Europe’s leaders to move toward a more monetary and banking union
backed by fiscal integration and “more risk sharing”.
Various
eurozone member states, including Greece, Spain and Italy, have been struggling
with deep economic woes since the bloc's financial crisis began roughly five
years ago.
There
are worries that more delays in resolving the eurozone debt crisis, which began
in Greece in late 2009 and infected Italy, Spain and France last year, could
push not only Europe but also much of the rest of the developed world back into
recession.
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