The Imf And Its Involvement In Europe

The IMF has played an important role in history. It was created to promote international monetary corporations; to facilitate the expansion and balanced growth of international trade; to promote exchange stability; to assist in the establishment of a multilateral system of payment; to make its general resources temporarily available to its members experiencing balance of payment difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. The IMF came into being in 1944 - - along with the International Bank for Reconstruction and Development. The two were created to oversee stability in international monetary affairs and to facilitate the expansion of world trade. Membership in the World Bank requires membership in the IMF, and they are both specialized agencies of the United Nations. The World Bank was given domain over long term financing for nations in need, while the IMF’s mission was to monitor exchange rates, provide short term financing for balance of payment adjustments, provide a forum for discussion about international monetary concerns, and give technical assistance to member countries. These functions are still generally true of both organizations, although the policies that determine how they are carried out have been modified and amplified over time.

The IMF’s and its current involvement in Europe is what we will focus on. In fact, only a month ago, it was reported that the International Monetary Fund’s regional economic outlook for Europe sees a definitive need for financial sector, fiscal and structural reforms due to financial turbulence, and, in order to sustain growth throughout Europe. The IMF released it inaugural Regional Economic Outlook for Europe which sees growth easing moderately throughout Europe to an inflation-adjusted 3.2 percent in 2008, from 3.7 percent in 2007, unless financial market turmoil fails to dissipate. Emerging Europe’s growth is set to remain relatively robust at 5.7 percent in 2008. Mr. Michael Deppler, Director of the IMF’s European Department, emphasized the report’s main findings: “financial turbulence has hit Europe at a time when growth was showing momentum. Sound policies, a favorable global environment, increasing trade and financial integration been yielding clear growth dividends for advanced economies and convergence benefits for emerging Europe. The outcome is a projective easing of growth in 2008, to a level that remains nonetheless fairly robust, but also heightened uncertainty and the risk that financial market turmoil - - should it linger - - may depress this outlook. A balanced policy response would consist of dealing upfront with the financial market turmoil, while implementing fiscal consolidation and structural reforms, included in the financial sector, to address Europe’s vulnerabilities, raise its medium-term growth performance, and deliver on the promise of convergence for Europe’s emerging economies”. Deppler continued - - the ongoing financial turbulence throughout Europe has underscored the need for financial sector reform. It revealed that private and public prudential framework will need to do a better job at keeping up with financial innovation. Clearly, the tendency of new financial products to exploit gaps in prudential framework can prove problematic and must be guarded against. Europe’s structural reforms have paid off, but on average, structure rigidities remain a weak spot and most of Europe’s advanced economies are still failing to make notable progress in closing the transatlantic divide in GDP per capita. Yet, as shown by its most successful performers, further steps to improve labor market flexibility and enhanced competition are bound to pay off. To make convergence sustainable, emerging economies will need to focus on strengthening the contestability in domestic markets and improving the business environment (M2 Presswire, 2007, 2). The bright spot in the report had to do with Europe’s structural reforms which have paid off for them. Also, European economies can reach significant efficiency and resilience benefits from sustaining the development of their financial systems.

According to the most recent reports, Europe is less at risk than the United States, according to the IMF. Strong fundamentals mean that the European economy is in a good position to weather financial turbulence but the banking sector needs to beef up its approach to risk management, the International Monetary Fund said recently. In its inaugural “Regional Economic Outlook” said that the European economy was generally less at risk than that of the United States. However, it did see a fairly widespread slow down in the region and said major central banks had been right not to raise interest rates. “In Euro area and several other advanced economies, monetary policy has been appropriately kept on hold in view of the downside risks associated with the financial turmoil,” it said. The IMF said that the European Central Bank might need to resume raising interest rates if the recent increase in credit costs eased, in order to curb inflation. The ECB, which has raised its benchmark rate eight times in the past two years, on November 8 left its benchmark at four percent as policy makers weighed signs of exploring economic growth against the threat of accelerating inflation. The IMF said risks to the outlook also come from the protracted tightening of credit conditions, oil prices, and foreign exchange rates. But it noted that risks from the housing market posed less of a risk to Europe than to the United States. “Housing markets in Spain, UK and Ireland are at one end of the spectrum, but for the continent as a whole, it is reasonably balanced,” Deppler said. “We do not see Europe in the same situation as the United States.” The European Union’s economy will probably expand 3.2 percent in 2008 compared with 3.7 percent this year, the IMF said. Emerging economies, though less affected because of their “limited reliance on interbank market and complex financial products”, may be heard by a greater overall aversion to risk and slowing foreign demand. In the Euro area, fiscal consolidation has continued in 2007 and is projected to stop in most countries in 2008. France and Italy are planning tax cuts and postponing further consolidation, the IMF said (Reuters, 2007, 4). The IMF’s Regional Outlook also outlined better ways in which risks from the financial sector could be reduced. Better risk assessment models, liquidity risk management, due diligence and transparency were all on the agenda.