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

June 6, 2019

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

Later on Thursday, the ECB is expected 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 summarizes 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 favor internal and external rebalancing which the IMF considers useful as its staff “still see a small undervaluation of the euro exchange rate,” the document said.

(Reporting by Francesco Guarascio @fraguarascio; Editing by Philip Blenkinsop and Catherine Evans)

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