WASHINGTON, Sept 16 - The euro is suffering an unfair share of the pain from a weaker dollar and this has hit the economic recovery, the IMF said on Tuesday as it cut its forecast for the bloc's growth this year to 0.5 percent. With China and Japan expected to face calls this weekend at a Group of Seven meeting in Dubai to let the yuan and yen rise, the International Monetary Fund's annual assessment of the euro zone warned that the common currency was getting a rough deal. "The euro has borne a disproportionately large share of the burden of adjustment to a weaker dollar and (directors) called for a more equitable global distribution of any further adjustment burden to reduce imbalances in the global economy."
The roughly 25 percent appreciation of the euro from last year was beneficial on balance but "is detracting from the area's near-term prospects", the fund said in a statement. These prospects were already pretty bleak: "Area-wide stagnation is expected to be overcome only gradually, with growth remaining sub-par well into next year," it said. The IMF cut its forecast for 2003 euro zone growth to 0.5 percent from a previous estimate of 0.75 percent and urged the European Central Bank to hold down interest rates which are already at a 50-year low of two percent. "With hard data on the recovery lacking, monetary policy should maintain an accommodative bent -- a sustained easing bias -- until a self-sustaining upturn in domestic demand, particularly of corporate spending, is in place," it said.
The fund said inflation would fall well under two percent in the euro zone next year, from a preliminary 2.1 percent in August, but the ECB should be wary of driving it too low. "The risks and costs of undershooting the ECB's inflation objective remain greater than those of overshooting it." The IMF warned earlier this year that Germany, the euro zone's largest economy, ran a risk of falling into a Japan-style deflationary trap.//