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Euro zone in ‘critical’ danger: IMF

Jose Manuel Abel, 46, cries as he waits to catch a flight to Munich at El Prat airport in Barcelona June 29, 2012. A former salesman, Abel has been unemployed for more than two years. He has decided to leave his family and move to Germany to work in a Spanish restaurant.

Marcelo del Pozo/REUTERS

The euro zone is in "critical" danger but can restore credibility with urgent action for a banking union, with some form of euro bonds, and if the ECB ramps up injections of cash, the IMF said on Wednesday.

The European Central Bank should pull harder on its levers of special measures to buy government debt and fund banks, and should be open about its targets, the IMF said.

In a hard-hitting review of policies for the euro area, it warned: "The euro area crisis has reached a new and critical stage.

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"Despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself."

A worsening of the crisis would have a big impact on neighbouring European countries "and the rest of the world."

It warned: "A determined move toward a more complete union is needed now."

On growth, the International Monetary Fund said that the "stark" truth was that euro zone countries had lagged the best performers for 50 years.

The euro is slightly overvalued by zero to 5.0 per cent, the IMF estimated, but some countries in crisis needed a much bigger adjustment, of 5.0-10.0 percent for Italy and 10.0-15.0 per cent for Spain.

Determined programs for structural reforms to raise competitiveness were vital, the IMF said, warning also of a risk of deflation and suggesting that strong countries in northern Europe could allow wages and inflation to rise.

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