BRUSSELS (Reuters) - European economic growth is strong, mainly thanks to domestic demand, but governments are not taking sufficient advantage of the good times to reduce their debt and implement reforms, the International Monetary Fund said in a forecast on Tuesday.
The IMF forecast that growth in advanced European economies, mainly the euro zone, would slow to 2.3 percent this year from 2.4 percent in 2017 and then decelerate to 2.0 percent in 2019. The European Commission forecasts the same growth slow-down.
“Amid the good times, however, fiscal adjustment and structural reform efforts are flagging,” the IMF said.
“With economic prospects continuing to improve in the short term but medium-term prospects less bright, policymakers should seize the moment to rebuild room for fiscal manoeuvre and push forward with reforms to boost growth potential,” the IMF said.
Despite the strong growth, some of the biggest euro zone economies like France, Italy or Spain have been slow to further reduce their budget deficits towards a balanced position while others, like Belgium, are increasing the shortfall.
“In many economies, policymakers should strive to bring fiscal deficits within range of balance over the next few years,” the IMF said.
“This way, automatic stabilizers and fiscal stimulus can be deployed again, should downside risks materialise. Also, stabilizing and bringing down public debt would help economies better cope with the pressures from growing expenditures on pensions and health care,” it said.
The IMF also noted that the strong economic growth provided an opportunity for faster deepening of euro zone economic integration, primarily through the completion of the banking union, which already features a single supervisor for euro zone banks and a single resolution authority but still lacks a joint deposit guarantee scheme.
With Britain, a major financial centre, due to leave the European Union in March 2019, the EU should speed up the construction of a capital markets union to widen financing choices of small and medium-size firms, harmonise insolvency laws and protect cross-border investor rights, the IMF said.
The IMF also threw its weight behind the idea of creating a pool of money for the 19 countries that share the euro to help their economies against crises not of their own making.
The IMF called it the “central fiscal capacity (CFC)” and said it should work on the basis of loans, not permanent transfers.
“The CFC could employ something known as a ‘usage premium’, through which a country pays a premium in good times based on transfers it got in bad times,” the IMF said.
“Second, the CFC could place a cap on the amount countries must contribute to prevent some countries from becoming large net contributors. Finally, it could limit how much a country can receive, so that transfers do not substitute for necessary policy adjustment,” it said.
Euro zone countries are also considering ideas for such a loan-based budget. The European Commission proposed earlier this month it should be part of the overall long-term budget of the EU and total 55 billion euros.
Reporting by Jan Strupczewski; Editing by Hugh Lawson