The International Monetary Fund (IMF) forecasted Monday that the severe economic downturn for the Euro Zone could end during the second half of 2010, but further policy actions especially in the financial sector will be essential to induce this recovery.

“The measures taken to counteract the deep recession in Europe have provided a good foundation for a gradual recovery, but further actions by policy makers, particularly in the financial sector, are needed to restore market trust and confidence, and accelerate the recovery,” said Marek Belka, Director of the IMF’s European Department.

The IMF notes in its Spring 2009 Regional Economic Outlook for Europe that economic activity is likely to contract most in emerging economies in the region this year, although activity may rebound slightly more in 2010 compared to the advanced economies of Europe.

For European advanced countries, the IMF forecasts a 4% contraction in 2009. The advanced countries are still expected to record negative growth in 2010.Emerging economies are expected to see a 4.9% decline in 2009, with a return to growth of 0.7% in 2010.

Inflation is expected to fall to very low levels in many countries, but deflation is likely to be avoided, according to the IMF.

With low inflation, consumers could regain confidence earlier, but continued weak global demand could lengthen and deepen the recession.

Further policy action, especially in the financial sector, is required to restore market trust and confidence in all countries, the IMF stressed.

“What is mostly needed is a robust approach to coordination, in particular on financial and regional macroeconomic stability,” said Belka. “Europe is the most economically integrated market economy in the world, and yet the policies to address the crisis have been undertaken at the national level.”

“Without a well-coordinated effort in these areas, neither fiscal nor monetary policy efforts will work effectively. Europe is facing the economic storm of a lifetime and it urgently needs to weatherproof its institutions,” he added.

He also called for improving the EU's financial stability framework. European banks have suffered greatly from the turmoil that began in the US housing market. Many European countries last year rushed to bail out banks and guarantee lending between them.