--IMF draft: Reasonable for ECB to await data before rate cut
--IMF draft: Euro-zone 2000, 2001 growth "close to potential"
--IMF draft: Euro-zone inflation risks are abating
--IMF draft: Euro-zone stability programs "somewhat disappointing"
--IMF draft: Euro-zone fiscal policies toughen ECB monetary task
--IMF: Euro-zone lays foundations for virtuous growth cycle

By David Thomas, BridgeNews
Brussels--Feb. 5--The International Monetary Fund says that it generally backs the decision of the European Central Bank to hold off on rate cuts pending further economic data, in a so-far confidential report on the euro-zone economy. However, it concludes that inflation in the zone is abating and that if the U.S. slowdown worsens the case for a reduction will "become more clearcut."
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The comments appear in a first draft of "The concluding statement of the IMF Mission to the euro area," a copy of which was seen by BridgeNews. The report is part of the annual Article IV consultation process, which the IMF carries out in all Fund member states.
LAYING FOUNDATIONS FOR VIRTUOUS GROWTH CYCLE
The draft states that the current task of the zone "is to sustain a strong economic performance amid changing circumstances." Further, "It is vital to the area and to the international community to sustain global growth in a context of weakness elsewhere."
The tone of the draft confirms initial BridgeNews reports last week describing the document as generally "upbeat."
Breaking with the traditional U.S. Treasury/IMF criticism of European economic policy being overly reliant on external demand, the document notes that the zone's growth "has its roots in domestic demand." Moreover, "wage moderation and supportive policies are laying the foundations for a virtuous growth cycle," the IMF states.
"These auspicious indicators are set to continue," the Fund goes on, saying that the "most plausible" scenario for 2001 and 2002 is of growth "close to potential" (generally reckoned to be between 2.25% and 2.5%).
This would necessarily be substantially lower than the 3.5% previously forecast by the European Commission last autumn as well as the "close to 3%" which EU finance ministers and the ECB have continued to use until now.
INFLATION RISKS ABATING
Unsurprisingly, the report adds the caveat that the "risks are on the downside." While it concedes that inflation risks have not disappeared from the zone, it adds, "but these are abating."
On fiscal policy, the Fund sees the latest batch of eur-zone stability programs "as somewhat disappointing" and says that this has complicated the conduct of monetary policy by the ECB.
The IMF argues that the consolidation measures for the medium term outlined by member governments are too "timid" and calls for a "more meaningful restructuring" of spending and tax policies.
The Fund admits that the zone's performance on structural reform is probably better than is generally recognized and argues that Europe "continues to surprise" on this front. However, overall this is an "unfinished agenda", according to the IMF.
The Fund also voices worry that reform efforts might weaken as election deadlines loom closer in Europe. "More effective surveillance" of euro-zone economic policies would also come in handy, the Fund states.
CASE FOR ECB CUT MAY BECOME MORE CLEARCUT
On the monetary stance of the ECB, the Fund does not court controversy, but says "it is reasonable to await more information," echoing the "wait and see" line adopted by ECB President Wim Duisenberg last Thursday. However, the case for easing may become "more clearcut" if the U.S. slowdown sharpens, the Fund says. End