By Simon Nixon 

The International Monetary Fund had a clear message for economic policy makers gathered in Washington for its annual meetings last week: don't waste a recovery. The global economy is enjoying a robust upswing, so governments should fix the roof while the sun is shining.

It was a message directed particularly at the eurozone. The strength of the currency bloc's recovery has taken almost everyone by surprise, not least the IMF, which upgraded its forecast for eurozone growth in 2018 by 0.2 percentage point to 2.1% compared with its July forecast, putting it on a par with the U.S. This recovery is both broad-based, spanning all countries and sectors, and well-balanced -- with household spending, exports and investment all playing their part.

Yet government debt in eurozone most countries remains high; some banks are still sitting on large piles of bad debt; inflexible product and labor markets hold back potential growth across the currency bloc; and the eurozone debt crisis revealed serious shortcomings in its architecture.

Action is needed at both national and eurozone level to tackle these vulnerabilities to increase the eurozone's resilience to future shocks that could strike at any time -- perhaps as a result of a botched Brexit, an escalation of the crisis in Catalonia, a global trade war, or market turbulence as central banks tighten monetary policy. But will governments seize this chance?

France certainly appears determined to grasp the moment. Since the election of Emmanuel Macron in May, it has delivered a major labor market reform and is working on important overhaul of the tax, pension and training systems that should encourage investment and job creation.

But elsewhere, there are signs of complacency. Spain and Portugal, for example, delivered impressive reforms at the height of the crisis, but those efforts have since stalled, while both have relied on cyclical rather than structural measures for the bulk of their recent deficit reduction.

Italy remains the main source of anxiety. Rome faces bigger challenges than most other eurozone countries, given the size of its national debt -- equivalent to 130% of gross domestic product -- its large overhang of bad debt in the banking system -- equivalent to around 6% of GDP -- and its deep structural problems, including a highly inefficient public administration and judicial system.

But while investors appear increasingly confident that elections next year won't result in a euroskeptic government, few believe it will lead to a government with an appetite for decisive overhauls. Meanwhile, Rome is resisting European Central Bank proposals that would require banks to write off bad debts more quickly.

What about action at eurozone level? European officials in Washington exuded confidence that the eurozone would complete its banking union -- further weakening the link between banks and governments -- and expand the role of the eurozone's bailout fund, giving the European Stability Mechanism a bigger role in economic stabilization -- including as a common backstop to underwrite the costs of winding down failed banks.

But the price of German support for completing banking union is likely to be new rules limiting the exposure of banks to individual governments, which is resisted by Italy, and increasing bank holdings of loss-absorbing capital, which is resisted by France.

An even bigger fight looms over the governance of an expanded European Stability Mechanism. Germany wants the ESM to remain an intergovernmental arrangement operating on the basis of unanimity among its members, enabling Berlin to retain a veto over its activities; Berlin is wary of calls for the ESM to be brought under the EU Treaties, with control effectively exercised by the European Commission, which Berlin accuses of being too political.

Yet critics say that what Germany is proposing will simply replicate the current dysfunctional governance, which virtually guarantees behind-the-curve lowest-common-denominator solutions to crises.

A third area of eurozone reform concerns the creation of a new eurozone budget -- a key demand of the French government. But while many expect Paris to be allowed a symbolic victory, few believe that any new budget will be sufficiently large to play a role in mitigating shocks. Paris itself won't say how big it thinks this fiscal capacity should be, how it should be funded, who would control it or even how it would be used.

Besides, the reality is that with the U.K. leaving the EU in 2019, the challenge will be simply to maintain the existing EU budget and its generous support for central and eastern Europe, without which a damaging east-west EU divide might deepen.

What is clear is that the window of opportunity for the eurozone to boost its resilience is unlikely to remain open for long. This year's elections in several major countries have injected a new political dynamism into the EU. But the EU will soon move into a new political cycle ahead of European Parliament elections in 2019 and the appointment of a new European Commission.

By then, memories of the eurozone crisis and the shock of Brexit may have faded, sapping the sense of urgency. That really would be a waste of a recovery.

Write to Simon Nixon at simon.nixon@wsj.com

(END) Dow Jones Newswires

October 15, 2017 14:36 ET (18:36 GMT)