In its annual review released on Thursday, the Washington-based lender praised the bloc’s recent efforts towards forming a centralised banking union as well as steps to oversee national budgets, which have helped to reduce risk of a breakup of the euro.
However, the IMF noted that despite policy action on many fronts, “recovery remains elusive” and urged eurozone authorities to take further measures to repair the balance sheet of banks, so that lending can resume particularly for small and medium sized companies.
Forecasting a contraction of 0.6 percent this year, the IMF said the European Central Bank may have to cut interest rates and launch a fresh round of monetary easing to help boost the eurozone economy, which is still weighed down by spending cuts.
"We worry that the economic recovery across the euro area remains elusive, and this weakness is now not only in the periphery, but also in the core countries," Deputy Director in the IMF’s European Department, Mahmood Pradhan, told reporters on a conference call.
“We see a stronger role for the ECB,” added Pradhan, welcoming the ECB’s recent change to its collateral rules to improve some banks’ access to ECB loans.
However, Pradhan said he was particularly worried about rising unemployment especially among the youth, which had increased the risk of stagnation and social tensions and spillovers to the global economy.
On Thursday, official data showed that Spanish unemployment had fallen for the first time in two years to 26.3 percent. Spain, the eurozone’s fourth largest economy and once the motor of job creation in the 17-nation single currency area, is now struggling through a double dip recession brought on by the collapse of a property boom.