IMF warns eurozone of political risks to economic recovery

The International Monetary Fund (IMF) said on Thursday political uncertainty, a rise in populism and the refugee crisis has reduced cooperation in the eurozone and its ability to restore economic growth.

In the IMF’s annual review report of the eurozone, it said the 19-member currency block should work to counter political tensions and eurosceptism which is characterised by the Britain’s EU referendum on 23 June.

The Washington-based fund is also troubled by protectionist rhetoric in the presidential campaign in the US and surge in populist parties in Europe. Although Britain is not part of the eurozone, eurosceptic parties are on the rise.

The IMF said: “Without more decisive actions to boost growth and strengthen integration, the euro-area may be subject to instability and repeated crises of confidence.”

The IMF advocated further centralisation to mitigate against risks such as setting up a common deposit insurance or a bigger investment fund in Europe, but is resisted by governments and in particular by Germany, Europe’s largest economy.

Divisions had “weakened prospects for collective action” leaving the currency area “increasingly vulnerable to risks while there is little policy space”.

The absence of co-operation in Europe was exemplified by the refugee and migrant crisis and the lack of consensus in dealing with it.

“The lack of a collective response to the refugee surge has vividly exposed political fault lines. If border controls persist, or refugee inflows pick up again, these divisions could deepen, jeopardising free movement within the single market.”

Despite the eurozone economy growing 0.6% in the final quarter of 2015 and the first quarter of this year, the IMF said the “medium-term outlook is still weak” and eurozone governments should not be complacent with their economic recovery.

“Crisis legacies, such as high non-performing loans in some banking systems, elevated levels of public and private debt, and still high unemployment, hold back potential growth and perpetuate imbalances. Productivity remains below pre-crisis levels and faces greater pressures from adverse demographics.”

In the future the eurozone will need its own treasury, the IMF said, adding that the €315bn from the European Fund for Strategic Investment should be spent on resettling refugees, energy infrastructure and climate change.

Dutch finance minister, Jeroen Dijsselbloem, said he recognised the concerns by the IMF but that there were limitations. “In the current political climate there won’t be historic steps forward, but there will be steps forward.”

Gerry Rice, an IMF spokesperson, added on Thursday the fund was making contingency plans for a potential Brexit vote, but maintained “the decision is clearly the prerogative of the British people. We fully respect that.”