TheIMF warned that the eurozone has become increasingly vulnerable to shocks asthe global slowdown continues to hurt the bloc and spillovers from Britain'svote to exit the EU contribute to greater uncertainty.
Despitea strengthened recovery in the eurozone, inflation and inflation expectationsremain below the ECB's medium-term price stability objective and thebloc's GDP growth is expected to decelerate to 1.4% in 2017 from 1.6% in 2016.Due to low inflation, the ECB would need to provide additional monetary easing,mainly through larger asset purchases, the IMF added in its annual review ofthe eurozone. The fund also noted the weaknesses in the bankingand financial sector in some European nations.
TheIMF called for collective action to achieve comprehensive and more balancedpolicies to respond to these risks, helping to rebuild the bloc's limitedpolicy buffers, boost growth and strengthen integration.
"Policies should prioritize structural reforms, enhancinginvestment and fiscal governance, maintaining supportive monetary policies,completing the banking union and repairing balance sheets," the fund said.
Italso urged supervisors to encourage the consolidation of the banking system aseurozone lenders' profits have remained subdued, making it difficult to raisefresh capital. Banks should also offload bad loans at a faster pace to restorefinancial health and further expand credit, it said.
TheIMF said the European DepositInsurance Scheme should be implemented rapidly along with measuresto reduce banking sector risks. The fund also called for faster progress towarda capital markets union to diversify funding sources and foster private sectorrisk sharing.