To avoid this, Europe needs to act on several fronts. Countries will need to have clear and specific commitments to medium-term fiscal consolidation, with the appropriate pace to be evaluated on a case-by-case basis. Careful consideration should also be given to the composition of fiscal measures. The European Central Bank (ECB) should maintain its very accommodative stance, he said, but noted that eliminating financial fragmentation – whereby households and companies in some countries face clogged credit channels and lending rates well above those in the core – will probably require the ECB to implement some “additional unconventional measures.”
Action on the Banking Union will also be essential to address financial fragmentation, he said, calling the Single Supervisory Mechanism “a key step” and adding that, on the single resolution authority, the IMF supports a market-based bail-in approach as being considered in the European Union Directive on Bank Recovery and Resolution, which would require banks to hold a minimum amount of securities with features that permit them to be written-off or converted to equity if capital buffers fall too low. “This approach places the primary burden on each institution and its creditors rather than its country, and could defuse some of the political tension on this subject,” Mr. Lipton added.
Despite the daunting challenges, Mr. Lipton said he remained optimistic as “Europe has risen to the challenge on difficult issues over and over again.” The IMF remains confident that they will continue to meet their commitments, he concluded.
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