Leaders ‘will drag heels’ in averting euro collapse

Eurozone politicians will still drag their heels on structural reforms, according to economists, in spite of last week’s warning from the IMF that this would have “substantial global implications”.

The IMF last week issued a report demanding “determined action” from eurozone politicians to address the continent’s debt crisis – which many fear could lead to the collapse of the euro.

The fund, which has helped bankroll the bailouts of Ireland, Portugal and Greece, called for a closer banking union and for the European Central Bank (ECB) to consider quantitative easing –something which it has so far resisted.

Jennifer McKeown, senior European economist at Capital Economics, said the IMF report would “provide some encouragement” for the ECB and politicians to do more, but cast doubt on whether it would result in “dramatic” policy changes.

Dario Perkins, director of global economics at Lombard Street Research, said: “The IMF report looked sensible, but it doesn’t reflect the politics of the situation. Politicians will keep deferring decisions, and the markets will eventually lose patience.”

The IMF report warned a “strong intensification” of the crisis – which would involve budget cuts affecting growth more than expected and banks requiring more capital than estimated –would “undermine already fragile market confidence” and “threaten sovereign debt trajectories and possibly market access”.

However, the crisis looked even further from resolving itself earlier this month after Germany’s constitutional court delayed a final decision on the legality of proposals to centralise banking supervision and subject eurozone members to strict budget rules. The ruling is now due to occur on September 12.

The EU wants to boost the size of the continent’s bailout fund to €500bn (£389.2bn) and transfer it to the European Stability Mechanism bailout fund. Germany is reviewing the proposal amid complaints that it goes against the country’s constitution.