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IMF sees euro as undervalued, ECB policy support necessary – document

IMF sees euro as undervalued, ECB policy support necessary – document

The International Monetary Fund believes the European Central Bank must maintain supportive monetary policy, an EU document seen by Reuters showed.

The document anticipated the content of a report the IMF will present to euro zone finance ministers next week.

The fund also intends to repeat its calls for Germany and other euro zone surplus countries to increase spending, while pushing Italy and other high-debt states to create more fiscal space by implementing structural reforms, the document said.

Those moves would help strengthen the euro exchange rate, which the IMF sees as slightly undervalued, the document said.

The ECB is expected today to announce new measures to help the ailing euro zone economy and may even set the stage for more action later this year.

The IMF will present its annual report on the 19-country euro zone to the bloc’s finance ministers at a meeting next week in Luxembourg, but the main issues of the report have been already discussed with euro zone representatives this week.

The IMF will say that “monetary policy accommodation by the ECB remains necessary,” said the document which summarises the content of the Fund’s report.

The IMF will also recommend that “countries with ample fiscal space should use it to boost potential growth” – seen as a reference to Germany, which maintains a large trade surplus.

On the other hand, euro zone countries with high debt, like Italy, “should create more fiscal space”, the document said.

These moves are expected to favour internal and external rebalancing which the IMF considers useful as its staff “still see a small undervaluation of the euro exchange rate,” it added.

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No deal Brexit risks severe economic shock, IMF warns

No deal Brexit risks severe economic shock, IMF warns

The UK economy risks a serious shock if the UK leaves the EU without a deal, the International Monetary Fund said today, warning of severe trade disruption and slower economic growth.

In a report marking the coming spring meeting, published just days before the scheduled Brexit date of Friday, the IMF looked at the impact of possible “no deal” scenarios.

In the worst-case situation, the fund assumes that a disorderly break between Britain and its largest trading partner would bring border disruption, raising import costs for businesses and households in Britain.

It estimates that the trade disruptions in that scenario would cause a decline in Britain’s gross domestic product (GDP) of 1.4% in the first year, and 0.8% in the next.

The European Union would not be immune from the impact, although it would be less severe, with the bloc’s GDP falling 0.2% and then 0.1%.

The IMF adds that the total impact would be a decline of 3.5% of British GDP between now and 2021 and 0.5% for the EU.

The fund notes however that it cannot predict all the effects of a no deal Brexit, or all the mitigating measures that might be taken.

The “no deal” scenarios assume that, in the absence of a new trade agreement, British exports to the EU revert to being subject to World Trade Organization (WTO) rules.

This would see tariffs increase, while Britain would also lose access to trade agreements struck between the EU and other countries.

The IMF estimates are also based on published British plans to dramatically slash tariffs on imports from the EU.

Even if there is a Brexit deal, the IMF is more pessimistic about the British economy for the next two years than it was in January.

It estimates an increase in GDP of 1.2% this year, rising to 1.4% in 2020.

Previous projections unveiled at Davos predicted growth of 1.5% and 1.6%.

The IMF report comes at the start of a decisive week, where EU leaders will decide at a Brussels summit tomorrow whether to agree to London’s request to delay Brexit day.

If they fail, or if Prime Minister Theresa May refuses to accept whatever they offer, Britain is on course to leave on Friday without a deal.

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