IMF Suggests Bank Reform and Steps to Support Demand in Europe

In its assessment, the IMF offered this advice. Europe needs to do the following:

• Restoring the health of banks’ balance sheets. To raise confidence, a credible assessment of the quality of banks’ assets is needed. Such an assessment would quantify capital needs and should be accompanied by a clear plan on how to meet these needs. Where private capital is insufficient, credible backstops — in some cases, the ESM — will be essential to preserve banks’ ability to continue lending.
• Completing the banking union. This would entail expediting reforms already under way, such as adopting the legislation for the Single Supervisory Mechanism and reaching final agreement on the Bank Resolution and Recovery Directive. It should also involve the introduction of a strong, single resolution mechanism that ensures swift resolution of banks, limiting the overall cost to taxpayers.
• Taking further steps to support demand in the near term. The IMF welcomed the recent introduction of forward guidance and the ECB’s commitment to keep the monetary policy stance accommodative for as long as necessary. The IMF also said that while monetary policy alone cannot address structural banking sector weaknesses, it can provide essential space, with additional conventional and unconventional measures as needed. In addition, fiscal adjustment in euro area countries should be carefully paced to avoid an excessive drag on growth.
• Pushing ahead on structural reforms. Tackling structural gaps — at both the euro area and the national levels — would raise potential growth and promote external adjustment within the euro area. Implementation of the Services Directive could encourage cross-border competition and raise productivity, while national efforts to address labor market weaknesses would boost competitiveness and employment.