In a press release today, the IMF’s latest mission to Greece reported that the country’s macroeconomic outlook remains the same as previously projected, with some slow growth expected to resume in 2014. The government promises to take some corrective measures to achieve its fiscal targets for this year. The government is still aiming for primary balance in its budget this year. It is still working on controls over excessive health care spending. Here are some of the other steps the government is taking towards reforming its finances:

The income tax, property tax, and tax procedure codes are being reformed, and the autonomy and efficiency of revenue administration is being strengthened. The authorities have also committed to take steps to bring public administration reforms back on track, such as by completing staffing plans by end-year, placing staff in the mobility and reallocation scheme, and meeting the agreed targets for mandatory exits. With the recapitalisation of the banking sector nearly complete, the authorities have committed to further steps to safeguard financial stability, including through the sale of two bridge banks and completion of their strategy for a four-pillar banking system. These reforms are a further important step towards facilitating adjustment and enabling growth. The mission also discussed with the authorities progress in strengthening the social safety net, including through targeted employment and training programmes supported by the EU and a programme to provide access to primary health care for the uninsured.

The IMF conducts regular (usually annual) missions to member countries “under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.” Today, the IMF posted the concluding statement of the mission to Italy. Basically, progress is being made toward fixing the country’s economy, but more needs to be done at a faster pace:

The euro zone crisis hit Italy hard, but the seeds of Italy’s low growth pre-date the crisis and follow from its stagnant productivity, difficult business environment, and over-leveraged public sector. Accelerating reforms to address these structural weaknesses will be crucial to limit the risks of long-term unemployment, especially for the youth, and raise Italy’s trend growth.

The IMF mission concluded that Italy must boost business competition by lowering barriers to entry and reducing regulations. The high cost of electricity (up to 40% greater than in France and Germany) has also been a drag on Italy’s competitiveness. The justice system is woefully inefficient with a significant backlog of cases, which increases the cost of doing business. There are too many small firms. As for fiscal policy, the IMF wants to see stepped-up efforts to combat tax evasion, “including through better use of anti-money laundering tools, and increasing the inheritance tax would also raise revenue and more fairly distribute the tax burden.” Italy’s banking system is in woeful shape as the “ratio of nonperforming loans has almost tripled since 2007, while provisioning coverage has declined.” The mission statement recommends that Italian banks sell, dispose, or write down impaired loans. The ECB and the EU could help as follows:

Direct asset purchases by the ECB, such as for SME credits, another LTRO of considerable tenor, and lower haircuts on eligible collateral would help lower bank funding costs and lending rates. Greater progress in the banking union, especially the single resolution mechanism and ESM backstop, would help sever the sovereign banking link. Moves to strengthen the common market, such as the Services Directive, would enhance the cross-border benefits of reforms. Progress in European policies combined with vigorous reforms in Italy would go far in producing a more vibrant and dynamic currency union.

Both the BOE and the ECB did something new today. They provided forward guidance on their policy for their key interest rates. Both implied that the recent jump in bond yields triggered by the Fed’s intention to taper QE may require them to keep their key rates at their current 0.5% and maybe lower them.

Just four days after Canadian Mark Carney became the new governor of the BOE, he seems to have convinced his colleagues on the Monetary Policy Committee to issue a statement showing it is in no rush to raise rates. Here is the relevant comment from the statement on this subject from the BOE today:

At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

Additionally, the first question asked by a reporter at today’s ECB press conference with Mario Draghi was why the ECB wasn’t also providing forward guidance. The ECB president scolded the reporter, saying that the reporter obviously hadn’t been listening to his prepared remarks:

Yes, that is why I said you haven’t listened carefully. The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key…” – i.e. all interest rates – “…ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney said in London is just a coincidence.

He responded to another question on this subject by specifying the variables that will influence the ECB’s rate-setting decisions in the future:

Together with the sense of the length of time, you also have to look at three sets of economic variables, namely the medium-term outlook for inflation, the economy and monetary dynamics. Monetary dynamics means monetary aggregates and credit flows. What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future linked to its assessment of these three sets of variables. The decision was unanimous, which is also quite important.

This BIS working paper examines data from 39 financial crises, which—like the current one—were preceded by credit booms. Surprisingly, the major finding is that deleveraging following a crisis doesn’t have to depress growth. Here is the paper’s conclusion:

We find that bank lending to the private sector and economic growth are essentially uncorrelated after those financial crises that were preceded by credit booms. This result is relevant for the major advanced economies recovering from the financial crisis, since the current crisis was also preceded by a credit boom. Our results suggest that the ongoing deleveraging in advanced economies might not be as harmful for the recovery as many fear.

We also find that depreciating real exchange rates are statistically and economically significantly associated with substantially stronger economic growth. This finding on real exchange rates shows that the price channel for external adjustment can contribute to stronger economic activities. Consequently, if crisis hit countries can generate substantial real effective exchange rate depreciation, either via nominal exchange rate depreciation or internal cost adjustments, this could hasten their recovery. However, given the global nature of the current crisis this solution might not be available for all countries at the same time.

In his introductory statement during today’s press conference, ECB President Mario Draghi said that the bank’s official rate would remain at 0.5%. This time, instead of saying that the ECB will do “whatever it takes” to support the euro zone’s currency and economy, he pledged easy money “for as long as necessary.” This is what he actually said:

Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics.

He stated that the risks for the euro zone economy remain on the downside:

The recent tightening of global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries.

He must have been pleased to report that financial conditions have improved significantly in the euro zone:

Since the summer of 2012 substantial progress has been made in improving the funding situation of banks and, in particular, in strengthening the domestic deposit base in a number of stressed countries. This has contributed to reducing reliance on Eurosystem funding, as reflected in the ongoing repayments of the three-year longer-term refinancing operations (LTROs). In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Further decisive steps for establishing a Banking Union will help to accomplish this objective. In particular, the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation.

In its statement today, the Bank of England’s Monetary Policy Committee (MPC) announced that the bank’s official rate will remain at 0.5% and its QE target will remain at £375 billion. The MPC noted that the UK economy is improving, but “it remains weak by historical standards and a degree of slack is expected to persist for some time.” The statement expressed some concern about the rise in interest rates around the world and the increased volatility of asset prices since the May meeting of the MPC. Inflation in the UK remains above the MPC’s target:

Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

Not mentioned was the impact of a weaker pound on inflation. UK policymakers are probably hoping that a weak currency will boost exports more than it will boost inflation. On July 1, Markit’s press release reported that UK manufacturing is picking up:

The UK manufacturing sector maintained its solid second quarter performance into June, with levels of production and new business rising at the fastest rates since April 2011 and February 2011 respectively. Domestic market conditions improved further, while demand from overseas also strengthened. At 52.5 in June, up from a revised reading of 51.5 in May, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) posted above the neutral mark of 50.0 for the third month running. Moreover, the rate of improvement signaled by the PMI was the steepest for 25 months. The average reading over the second quarter as a whole (51.4)was the highest since Q2 2011….Incoming new orders rose for the fourth consecutive month in June. Manufacturers reported solid demand from domestic markets and clients based in Europe, China, North America, Scandinavia and the Middle East.

On July 3, Markit’s press release reported that UK services are also improving:

UK service sector growth accelerated to its highest level since March 2011 during June as incoming new business rose at a rate unmatched for six years. The sharp increase in new business led to a marked rise in backlogs of work, and encouraged companies to take on additional staff to the strongest degree since August 2007…. After accounting for seasonal factors, the headline Business Activity Index recorded 56.9 in June, up from May’s 54.9 and the highest reading for 27 months. Growth has now been recorded for six successive survey periods, and has continually improved throughout this sequence.

(The minutes of the MPC’s meeting will be published at 9.30 a.m. on Wednesday, July 17.)

This short analysis of the Fed’s flow of funds data through the end of last year found that:

Although flow of funds data suggest household wealth has nearly rebounded to its pre-recession peak, adjusting for inflation, population growth, and a risk-free real interest rate shows there is still a substantial gap between the peak of household wealth in 2007 and the level today.

In a Public Policy Brief posted by the FRB-Boston, Rand Ghayad, a visiting fellow at the bank, questions whether long-term unemployment insurance worsens unemployment. In theory, the program creates a strong disincentive for unemployed workers to seek and take a job. The paper is titled, “A Decomposition of Shifts of the Beveridge Curve.” This curve shows an inverse relationship between job openings as a percentage of the labor force and the unemployment rate.

The curve has shifted to the right since 2009 with more job openings for a given level of unemployment. One explanation for this shift is the increased availability of unemployment insurance benefits to the long-term unemployed. So this would suggest that allowing these benefits to expire should move many of the long-term unemployed back to work (or out of the labor force). That may be only half true, as the author of this paper reports:

Exploration of the evolution of job openings and unemployment using recent data on unemployed persons decomposed by their reason for unemployment, which determines their eligibility to collect benefits, suggests that up to half of the increase in the unemployment rate relative to the fitted Beveridge curve is explained by job leavers, new entrants, and re-entrants—those who are ineligible to collect unemployment benefits. Because unemployed job seekers who do not qualify to receive benefits compete for jobs with unemployed job losers who are eligible to collect UI, an unattractive vacancy that is refused by a job loser is likely be grabbed quickly by a new entrant or unemployed re-entrant who is not subject to any incentive effects. However, the evidence from the decompositions suggests that the increase in the unemployment rate relative to job openings will persist when unemployment benefit programs expire.

The Reserve Bank of Australia (RBA) left its key interest rate at a record low of 2.75% today. That’s down by 2 percentage points since November 2011. Governor Glenn Stevens said in a statement accompanying the decision that “the economy has been growing a bit below trend over the recent period” and “this is expected to continue in the near term as the economy adjusts to lower levels of mining investment.” The statement noted that a slide in the currency may continue:

The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.

The minutes of the June 4 Monetary Policy Meeting of the Reserve Bank Board stated:

The exchange rate had also depreciated noticeably, though it remained at a high level considering the decline in export prices that had taken place over the past year and a half. It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy.

Australia’s mining sector has been hard hit by the global economic slowdown, especially in China. The minutes noted:

Based on public statements by mining companies and information from the Bank's liaison, it seemed likely that mining investment was near its peak but would probably remain at a high level for the next year or so. However, members observed that there was considerable uncertainty about mining investment beyond that period. In particular, changes in production and exports of energy commodities in other countries were making it more difficult to assess the potential for new projects in the gas sector in Australia. Overall, conditions in the business sector remained somewhat subdued, with survey measures for all industries at, or below, average levels.

Bloomberg observed today that Prime Minister Kevin Rudd, who returned to office last week after a three-year hiatus, has focused on the risks of the slowdown in China. On June 27, a day after ousting Julia Gillard as leader of the ruling Labor party, he told Parliament: “The China resources boom is over. The China trade itself represents such a huge slice of the Australian national economy that we are looking at one huge adjustment for this nation’s standard of living in the future unless we continue to act with appropriate policy responses.”

John C. Williams (FRB-SF) is a non-voting member of the FOMC this year. In a speech today, he said that it is “too early” for the Fed to start moving toward tightening monetary policy. He is concerned that “ongoing fiscal contraction” is slowing the economy, and that inflation may remain below the Fed’s target. He stressed that the Fed’s decision to phase out QE will depend on the new incoming economic data. He repeated the party line that “reducing or even ending our [bond] purchases does not mean the Fed will be tightening monetary policy.” He also noted that regardless of what the Fed decides to do about QE, a “large majority” of FOMC “participants don’t expect the first increase in the federal funds rate to occur until 2015 or later.”

Williams had an interesting insight into the recent decline in inflation: “This partly reflects temporary factors, such as a decline in Medicare reimbursement prices forced by sequestration.”