Euro-zone debt will erode European growth, IMF says

The euro-zone’s debt problems have been well-publicized in recent months, and investors have grown wary of the effects that European nations’ debt will have on regional growth.

The euro slipped about 9 percent against the dollar in the second quarter on fears that governments’ debt-reduction measures would curtail expansion of the European economy. The euro has risen in recent days as those fears subsided – but the International Monetary Fund argues that the euro-zone is in for months of slow growth.

While the Washington-based lender did not change the euro-zone expansion forecast it made in April, it’s expecting European debt to have a "modest negative effect" on regional growth. The euro-zone economy will grow by just 1.6 percent this year and 1.3 percent in 2011 – far slower than the U.S., which the IMF says will grow by 3.3 and 2.9 percent. Needless to say, Asian emerging markets are poised for even faster growth: 9.2 percent this year and 8.5 percent in 2011.

The IMF is also raising questions about the recently announced bank stress tests. While the announcement of the tests provided support to the euro, the IMF is asking who would provide funding to inadequately capitalized banks, MarketWatch reports.

"The IMF is asking very valid questions," the financial news site says. "And until bank and national government balance sheets are recapitalized, the market will be asking them too."

The European Central Bank, for its part, has been more bullish than the IMF on regional growth. But even bank president Jean-Claude Trichet was cautious: He said July 8 that the euro-zone would grow "at a moderate and still uneven pace in an environment of high uncertainty."

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