Europe must mind jobs, growth in fiscal cuts -IMF

* IMF sees CPI staying in ECB’s comfort zone through 2011

* Europe’s potential growth hurt by “structural rigidities”

* Emerging European recovery depends on still unsure West

By Michael Winfrey

PRAGUE, Oct 20 (BestGrowthStock) – Europe’s recovery is underway but
governments must ensure necessary fiscal consolidation does not
hurt jobs or growth and can be slowed in some cases if momentum
stalls, the International Monetary Fund said on Wednesday.

Earlier this month, the Fund raised its growth outlook for
the euro area to 1.7 percent in 2010 and 1.5 percent in 2011,
and it said in the outlook inflation would remain low at 1.6
percent and 1.5 percent, respectively.

It said there were still risks, including the possibilities
of weaker than predicted global growth as well as renewed
volatility on European markets.

In its Regional Economic Outlook for Europe, the IMF said
developments in the continent’s emerging East would depend on
the richer West, where renewed instability could hit trade and
capital flows, hurting already weak domestic demand.

Advanced Europe would continue to lag more dynamic economies
in Asia and the Americas in part due to the impact of the crisis
and the struggle by governments from Britain to the Baltics to
rein in budget deficits.

“More than ever… the recovery depends on policymakers
getting it just right,” the Fund said.

“Fiscal consolidation, while inevitable, should be
undertaken in a way that minimizes the negative impact on growth
and unemployment; if growth threatens to slow appreciably more
than we expect, countries with fiscal room could postpone some
of the planned consolidation.”

But intransigent labour, product and service markets would
also limit the euro zone’s potential growth, particularly since
a restocking cycle that has been a main growth driver is waning.

Ajai Chopra, acting director of the IMF’s European
Department, added that policymakers should follow up on stress
tests conducted at the end of the summer to ensure banks have
adequate capital without delay.

“The results of the recent European Union-wide stress tests
provide a rough guide of the banks that may need to be merged or
recapitalized,” he said in a statement.

The Fund said governance of the European Union and euro area
need to “be fundamentally improved” and argued evidence showed
fiscal consolidation would be more successful by selectively
cutting costs than trying to raise revenue through tax hikes.


The Fund noted that, largely based on a rebound in exports,
especially to Germany, Europe’s developing economies were
recovering from the deepest contraction since the 1989 fall of
Communism. It forecast growth of 3.9 percent this year and 3.8
percent in 2011.

It said fiscal consolidation would help relieve concerns
over debt that forced bailouts of Hungary, Romania, Latvia among
others, although budgets deficits in Bulgaria, Belarus, Serbia,
Kosovo and Montenegro were expected to rise in 2010.

Domestic demand, hurt by a collapse in the lending that
spurred double-digit growth in some countries earlier this
decade, continued to remain weak and countries needed a new
model to resume catching up with the West, it said.

“Beyond the short term, the region will need to find new
growth engines, as the growth model of the boom years — driven
by capital inflows, rapid credit growth, and domestic demand
booms — will need to shift toward greater reliance on the
tradable sector as an engine of growth,” the IMF said.

(Editing by Patrick Graham)

Europe must mind jobs, growth in fiscal cuts -IMF