The euro zone sovereign debt crisis is a threat to economic recovery and the euro zone must co-operate more to contain it and consolidate fiscally to restore confidence, the International Monetary Fund said on Monday.
"A broadly sound recovery continues, but the sovereign crisis in the periphery threatens to overwhelm this favourable outlook, and much remains to be done to secure a dynamic and resilient monetary union," the IMF said in a regular report on the 17 countries using the euro.
"A strong core is pulling ahead of a periphery facing daunting challenges, with very high debt levels, severe competitiveness problems, and fragile banking systems," the IMF report said.
"Strong policy action by national authorities is a prerequisite, but should be backed by a truly cohesive approach from all euro area stakeholders. While courageous attempts have been made to address the crisis, policymakers are yet again facing uncomfortable dilemmas, raising uncertainty about the final outcome," it added.
The report said that unless the euro zone takes decisive action, market tensions now focused on periphery economies could spread to the core of the euro area and beyond.
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