IN the just-published Article IV Consultation paper on the Euro area, the International Monetary Fund (IMF) opines that economic recovery in the zone will continue in 2022 in spite of near-term headwinds linked to the pandemic.

It is the fund’s assessment that the Euro area, which fell under a marked recession in 2020 and further contracted in the first quarter of 2021, recovered in the second and third quarters mainly due to high vaccination levels, increasing household and “business adaptability to the virus,” as well as continued forceful policy support.

In its projections for 2022, the IMF states that while supply chain disruptions, higher energy prices, and new breakouts in COVID-19 cases — including those related to the Omicron variant — are likely to pose near-term challenges, the recovery is set to continue.

This will happen, it was stated, as the “impact of the pandemic on economic activity continues to weaken over time and supply-side constraints ease.”

The assessment is that medium-term output losses relative to pre-crisis trends will vary across countries and sectors. The IMF notes that in the Euro area, “price pressures are building up as production bottlenecks are set to persist for a while.”

However, inflation — despite an upward movement in recent months — is projected to moderate during 2022 and remain below the European Central Bank (ECB’s) inflation target over the medium term. Given that note, the IMF staff says the ECB “should stand ready to adjust course as needed” in the face of “upside inflation risks” which it points out “have clearly increased.” The prodding comes as the ECB opted last week to hold interest rates steady, in the face of growing pressure to curb stimulus plans, with inflation running at 5.1 per cent in January. Other central banks have either started to hike rates or signal they may start soon.

The IMF cautioned that uncertainty surrounding the outlook remains high, largely related to pandemic dynamics and legacies.

Economic policies in the Euro area have supported household incomes and protected corporate balance sheets. High levels of vaccination and increasing adaptation to the pandemic have also helped to foster a strong economic recovery.

The Article IV assessment concluded, “The challenge now is to coordinate the normalisation of economic policy in the face of elevated uncertainty, including the evolution and legacies of the pandemic, as well as ongoing geopolitical tensions. Agility will be key, as policies become increasingly targeted to contain scarring and mitigate a potential rise in inequality and poverty.”

The fund cautioned: “Once the expansion is firmly underway, highly indebted countries in particular will need to reduce their debts. Credible plans to achieve this should be announced now. In addition, European Union fiscal rules need reform, including consideration of an EU-level climate fund.”

It is expected, it was said, that some Euro area countries could tighten their macro-prudential stance given stretched asset valuations, especially in real estate markets. The observation was also made that the labour market has recovered rapidly but unevenly across sectors.

The IMF stated, “Policies need to facilitate labour reallocation and protect the vulnerable, which includes reskilling and upskilling workers, using hiring subsidies, and enhancing targeted safety nets.”

It was stated that structural reforms and high-impact investment announced should be implemented as they are “crucial to enhance resilience, support green and digital transitions, and boost potential growth, it was said.