Olli Rehn, the European commissioner for economic and monetary affairs and the euro, last night (Monday) acknowledged the “difficult and painful” effects of fiscal reform across the eurozone – as the International Monetary Fund warned about “alarmingly high” risks to economic growth.
Rehn was talking at the conclusion of a meeting of the eurozone's 17 finance
ministers in Luxembourg during which the issues of Greece, Portugal, Spain and Cyprus were all discussed but little was decided.
They met as difficult negotiations between Greece's government and the ‘troika' of the IMF, European Commission and European Central Bank continue without conclusion, with Angela Merkel, Germany's chancellor, attempting to provide fresh impetus by visiting Athens today (Tuesday).
Rehn, who attended the finance ministers meeting, said: “I am well aware the present moment is difficult for the people of Spain. And the same goes for the people of Greece and Portugal.”
However, he said that “correcting macro-economic balances could not be avoided”.
“This was always going to be difficult and often painful,” he said.
Shortly after the finance ministers finished their meeting the IMF issued its World Economic Outlook that included warnings about global growth and about the economic performance of the eurozone in particular.
“A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery, or whether the current slowdown has a more lasting component,” the report said.
“The answer depends on whether European and US policymakers deal pro-actively with their major short-term economic challenges”.
The IMF predicts that global output will grow 3.3% this year, down from its earlier forecast of 3.5%. Next year it forecasts growth of 3.6%, down from its earlier estimate of 3.9%. It added however that there was an “alarmingly high” risk of a greater slowdown.
The IMF said that these forecasts still depended on politicians getting the eurozone crisis “under control”.
In the eurozone, gross domestic product (GDP) is forecast to go down by 0.4% in 2012.
The IMF predicted that Spain's economy would shrink by 1.3% next year – compared with a prediction of just 0.6% in July.
“Spain and Italy must follow through with adjustment plans that re-establish
competitiveness and fiscal balance and maintain growth,” said Olivier Blanchard, the IMF's chief economist in the report.
The eurozone's finance ministers agreed to release €800 million of Portugal's next bail-out instalment. Another €2 billion could be released later today if approved by all the EU's 27 finance ministers. A further €1.5bn is expected to be loaned by the IMF by the end of the month.
Ministers also discussed the latest situation in Greece. Christine Lagarde, the IMF's managing director, who attended the meeting, said that there was “progress on the ground” but that “more needs to be done on all fronts”.
Greece needs to reach agreement with its international lenders before a much delayed, bail-out instalment can be disbursed. Rehn said that he hoped this would happen before the end of October.
Jean-Claude Juncker, the prime minister of Luxembourg who chaired the meeting, said that he was “impressed with the performance of the Greek government and the willingness of coalition partners in Greece to undertake what needs to be undertaken to respond to our wishes and meet the needs of the Greek nation.”
Juncker added that finance ministers encouraged Spain to continue efforts to meet fiscal reform targets and called on authorities in Cyprus to “accelerate” work on finalising its plan for financial assistance from the eurozone.
A team from the IMF is scheduled to arrive in Spain at the end of next week to assess the implementation of financial sector structural reforms that are a condition of the country's banking sector bail-out.