THE INTERNATIONAL Monetary Fund (IMF) has cited Ireland and Spain as “good examples” of countries with “homemade imbalances” based primarily on “real estate and asset price bubbles”.
Marek Belka, director of the IMF’s European department, said Ireland and Spain had entered the financial crisis with “relatively low levels of public debt” enabling them “to react to the crisis by using the fiscal space that they had accumulated in good times”, but said they would have to cut wages.
“Now of course, both countries have been forced to start fiscal consolidation.
“In a monetary union, depreciating your economy out of the crisis is not an option,” he said.
“So countries must rebuild their competitiveness through factory-price adjustment, which often means unfortunately, cutting wages.”
Mr Belka said in an interview published on the IMF website that when the crisis hit, bubbles in Ireland and Spain “suddenly burst and the economies were hit not only by declining trade but also by sinking housing markets”.
He said European governments must switch from “extraordinary meltdown-preventing measures” for banking systems such as blanket guarantees to institution-specific measures. The banking sector in Europe was “not yet in as good shape as we would like it to be”.
“National authorities need to ensure that banks keep capital up to deal with the loan losses ahead and be in a position to extend credit.
“Weak banks should be required to raise capital and restructure or face resolution,” Mr Belka said.
