Europe
Reassessing Risks
April 2008
World Economic and Financial Surveys
Europe is facing slower growth as a result of protracted financial turbulence and spillovers from the U.S. Meanwhile, inflation has risen sharply. Policymakers in advanced economies will have to continue to support financial markets and balance risks to real activity with the need to anchor inflation. Emerging Europe is well placed to continue to grow, albeit at a slower pace, amid concerns about overheating and external imbalances in several countries. Sound macroeconomic policies and structural reforms will be necessary to ensure a soft landing in these countries and smooth convergence throughout the region. |
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Contents
| Executive Summary | |
| 1. | Outlook: Navigating Turbulent Waters |
| Advanced Economies | |
| Emerging Economies | |
| 2. | Financial Turbulence: Testing Resilience and Dampening Growth |
| How Financial Turbulence Spread To Europe | |
| Impact On Financial System Resilience | |
| Impact on the Real Economy | |
| 3. | Convergence in Emerging Europe: Sustainability and Vulnerabilities |
| Overview | |
| Sustaining Growth | |
| Addressing Vulnerabilities | |
| Running Sound Macroeconomic Policies | |
| Policy Agenda | |
| References | |
| Boxes | |
| 1. | Spillovers from Weaker U.S. Growth |
| 2. | Financial Turbulence: Policy Lessons |
| 3. | Understanding Food Price Inflation in Emerging Europe |
| 4. | Spillover Risks among Major EU Banks |
| 5. | Regional Financial Interlinkages and Contagion Channels |
| 6. | Banks' Risk Profile, Credit Growth, and the Real Economy |
| 7. | Real Sector Implications of Financial Turbulence for an Emerging Market Economy |
| 8. | Potential Growth Estimates in Emerging Europe Based on a Growth Model |
| 9. | Current Account Sustainability in the EU-10 |
| Tables | |
| 1. | European Countries: Real GDP Growth and CPI Inflation, 2006-09 |
| 2. | European Countries: External and Fiscal Balances, Government Debt, 2006-08 |
| 3. | Measuring the Impact of Risk Repricing on Selected Markets |
| 4. | Net Bank Exposure to U.S. Subprime Mortgage Markets |
| 5. | Estimated Losses on Mortgage-Related Subprime Bank Exposures |
| 6. | Output Response to Financial Shocks: Simulation Results |
| 7. | Response of GDP Growth to a 10-Percentage-Point Decline in Credit Growth |
| 8. | Determinants of Growth in Emerging Europe, 2003-07 |
| 9. | Sustainability of Current Account Deficits Based on a Model of Regional Convergence, 2007 |
| 10. | Response of External Debt-GDP Ratio to Adverse Shocks, 2007-11 |
| Figures | |
| 1. | Europe and the United States: Real GDP Growth, 2001-09 |
| 2. | Key Short-Term Indicators |
| 3. | Euro Area: Contribution of Food and Energy to Headline Inflation, January 2006-December 2007 |
| 4. | Euro Area: Cost of Financing, 2003-08 |
| 5. | Spreads of Three-Month Interbank Rates over Expected Policy Rates, 2007-08 |
| 6. | Changes in Credit Standards for Loans to Enterprises and Households, 2005-08 |
| 7. | Measures of the Euro Exchange Rate, 1999-2008 |
| 8. | Growth in Emerging Europe, 2001-09 |
| 9. | Emerging Europe: Confidence Indicators, January 2006-February 2008 |
| 10. | Emerging Europe: Sovereign and Corporate Bond Spreads, January 2007-March 2008 |
| 11. | Emerging Markets: Private Sector External Bond Issuance, 2006-08 |
| 12. | Emerging Europe: Bond Spreads and Current Account Deficits |
| 13. | Central and Eastern Europe: Credit Growth and House Prices, 2002-06 |
| 14. | Estimating Shifts in the Global Price of Risk, 2007-08 |
| 15. | Reassessing Risks Across Asset Classes and Borders |
| 16. | Euro Area Lending to Nonfinancial Corporations and Households, 2000-08 |
| 17. | Changes in the Balance Sheet of the European Banking System |
| 18. | Expected Default Frequencies (EDF), 2007-08 |
| 19. | Implied Spreads, 2007-08 |
| 20. | Market Leverage Versus Asset Volatility of Exposed EU Banks, 2007-08 |
| 21. | European Banks: Market Evaluation of Assets in Distress |
| 22. | Convergence in Emerging Europe and in the Rest of the World, 2002-06 |
| 23. | GDP per Capita and Current Account Balances, 2007 |
| 24. | Emerging Europe: Value Added by Sector, Contributions to Real GDP Growth, 2002-0 |
| 25. | Emerging Europe: Domestic and External Demand, Contributions to Real GDP Growth, 2002-06 |
| 26. | Emerging Europe: Growth Accounting, 2002-06 |
| 27. | Growth and Private Sector Credit Growth, 2002-06 |
| 28. | Emerging Europe: Contributions to Current Account Deficit, 2003-07 |
| 29. | Emerging Europe: FDI Coverage of Current Account Deficit, 2002-06 |
| 30. | Emerging Europe: Change in Current Account Balance and Real Effective Exchange Rate Appreciation, 2003-07 |
| 31. | Emerging Europe: Percentage Change in Export Market Shares in the World Economy, 2002-06 |
| 32. | Current Account Model Predictions and Actual Balances in Selected New EU Members |
| 33. | Emerging Europe: Ratio of Short-Term Debt (Remaining Maturity) to Foreign Exchange Reserves, 2007 |
| 34. | Emerging Europe: Lending Interest Rate-Taylor Rule Interest Rate, 2003-07 |
| 35. | Emerging Europe: Monetary Conditions Index, 2007 |
| 36. | Change in Actual and Structural Fiscal Balances, 2003-07 |