Looking for His glorious appearing! Titus 2:13

The International Monetary Fund has issued a blistering attack on Europe’s authorities for allowing the eurozone to remain stuck in a low-growth trap, warning that they may have to print money with “full conviction” to head off deflation.

“Inflation has been too low for too long. A persistent failure to meet the inflation target could undermine central bank credibility,” said the IMF with remarkable bluntness in its annual health report on the currency bloc.

“A negative external shock could tip the economy into deflation. The recovery is neither robust nor sufficiently strong. Financial markets are still fragmented, with contracting credit and high borrowing costs constraining investment in countries with large output gaps, large debt burdens and high unemployment,” it added.

The fund called for a “large-scale asset purchase programme” if inflation fails to pick up, as well as a concerted push to boost demand, arguing that 70pc of youth unemployment in the eurozone is caused by slump conditions rather than rigid labour markets or lack of skills, as often claimed.

The plea for action came as fresh data showed eurozone industrial output fell by 1.1pc in May, the latest evidence that recovery is close to stalling. The region’s industrial production is still down 12pc from its pre-crisis peak six years ago.

The IMF expects growth of 1.1pc this year and 1.5pc next year but warned that risks are “to the downside”, with the region vulnerable to fallout from monetary tightening by the US Federal Reserve or from a fresh storm in emerging markets.

Reza Moghadam, the IMF’s European chief, said the European Central Bank’s preferred tool of cheap loans to banks (LTROs) has not prevented a contraction of private credit or the stagnation of broad M3 money. It should not be confused with monetary creation under quantitative easing.

Asset purchases would have “wider and larger effects”, provided they were launched with the “full conviction” needed to change investor psychology. Japan’s failed attempts at QE in the years before the Abe era show that half-measures are almost useless when dealing with a balance sheet recession in which shell-shocked households and firms are trying to dig their way out of debt.

The IMF said the EU banking union is not yet fit for purpose, calling for a “common fiscal backstop” to break the “doom-loop” between banks and sovereign states, each dragging the other down in a crisis. This failing was starkly exposed again last week when minor troubles at Portugal’s Banco Espirito Santo triggered a systemic spike in Portuguese bond yields, with tremors reaching Spain, Italy and Greece.

The IMF said plans to let the eurozone’s bail-out fund (ESM) recapitalise banks directly is too vague, and does not lift the burden off struggling sovereign states since they cannot apply until they are already in deep trouble. Any action has to be approved by the German Bundestag and other parliaments, risking a political drama each time. It warned that near-deflation conditions are driving up real debt burdens and making it even harder for the crisis countries in Southern Europe to claw their way out of trouble.

“Over the medium term, there is a high risk of stagnation, which could stem from persistently depressed domestic demand due to deleveraging, insufficient policy action and stalled structural reforms,” it said.

The IMF said the fiscal squeeze from austerity is at last abating but that is not itself enough to ignite self-sustaining growth. The EU authorities may even need “escape clauses” to release countries from their fiscal straitjacket if deflation takes hold.

Mr Moghadam said QE is no panacea but would boost both the supply and demand for credit, acting as a powerful catalyst. There is no immediate risk of a credit bubble or a house price boom, even in Germany, he insisted.

The main thrust of QE should be through sovereign bonds, the “only viable option”, given the shortage of liquid assets and the taboo on buying equities. “ECB purchases should be across the board, not core or periphery, because the problem of low inflation is across the board,” he said.

This would neutralise claims the ECB is helping crisis states with quasi-fiscal help in breach of the Lisbon Treaty.

Gabriel Stein, from Oxford Economics, said the bar for QE remains very high, whatever EU treaty law says, since it would face huge political opposition in Germany, where the AfD anti-euro party has recently won its first seats in the European Parliament and the press views asset purchases as the road to perdition. The German constitutional court has already ruled that the ECB’s back-stop debt plan for Italy and Spain (OMT) is illegal and probably ultra vires. “The ECB is desperately trying to avoid doing QE. They are hoping that recovery will come along and save them in time.” he said.

Tim Congdon, from International Monetary Research, said the root-problem in the eurozone is the scale of deleveraging forced on banks by the European regulators. As banks sell assets to other investors to reduce balance sheets, they are automatically “destroying money” and reducing the M3 money supply. QE has become necessary to offset the effects. “Policymakers in the eurozone continue to do immense harm by giving a higher priority to the cleansing of bank balance sheets than to maintaining a positive rate of money growth,” he said.