IMF says Europe could suffer dangerous bout of deflation

20.07.2012 19:03
IMF says Europe could suffer dangerous bout of deflation

YEREVAN, July 20. /ARKA/. Europe could suffer a dangerous bout of deflation if regional officials, including those at the European Central Bank, do not move quickly to support the continent’s banks and the wider economy, the International Monetary Fund warned Wednesday, RBC reports.

The IMF called the euro zone “unsustainable” in its current form. The agency said the 17-nation currency union is a “half-finished” project and could disintegrate as banks and other nervous investors shelter money in their home countries rather than letting it flow across the euro zone.

“Financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself,” they wrote.

Europe’s financial problems are among the chief dangers facing the world’s weak economic recovery, undercutting global trade and causing investors to shy away from risky investments. The euro crisis has already become a drag on growth, from the United States to China.

In its report, the IMF warned that the crisis is reaching a point where a mild recession could give way to a more destabilizing round of deflation. Just as prices that rise too quickly can hurt a nation’s economy, falling prices can create a corrosive spiral that leaves consumers hesitant to spend because they hope prices will fall in the future. Meanwhile, companies and households can be pushed into bankruptcy as real estate and other asset prices fall, and banks can be saddled with potentially ruinous levels of bad loans.

The risk of a “debt-deflation spiral” is “significant” in troubled countries such as Italy and Spain that desperately need their economies to begin growing, the agency said.

In its report, the IMF suggested the ECB consider a wide range of steps — including the type of “quantitative easing” the U.S. Federal Reserve has used to increase the money supply and boost growth, as well as steps to hold down the borrowing costs of troubled governments. -0-


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