Europe
Regional Economic Outlook: Europe
May 2009
Addressing the Crisis
Europe is in a deep recession. Adverse feedback between the financial and real sectors and across borders is likely to delay the recovery and create downside risks. Unprecedented policies have been undertaken to address the crisis-but are they likely to be successful and sufficiently coordinated for a tightly integrated region? To restore trust and confidence in financial markets, additional and forceful action will be essential. Maintaining fiscal support should help soften the downturn, in particular if sustainability is supported by solid medium-term strategies and fiscal frameworks. To be effective, these policies require coordination across advanced and emerging economies. The report's analytical work underpins the link between fiscal sustainability, coordination, and effectiveness, and stresses that emerging markets have been affected differently by the crisis, with the quality of policies and external vulnerabilities being key factors. |
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Contents
| Press Points | |
| Executive Summary | |
| 1. | Outlook: Galvanizing Recovery |
| Synchronized Recession | |
| Impromptu Policy Reaction | |
| Uncertain Outlook | |
| Calling for a Well-Articulated and Effectively Coordinated Policy Response | |
| 2. | Fiscal Policy in Advanced Countries: Effectiveness, Coordination, and Solvency Issues |
| Overview | |
| Fiscal Costs of the Crisis | |
| Making the Most Out of Fiscal Interventions | |
| Treasuring Fiscal Solvency | |
| Ensuring Fiscal Sustainability: Policy Options | |
| Conclusions and Policy Implications | |
| 3. | European Emerging Economies in the Crisis: Impact and Recovery |
| Who Got Hurt More? Stylized Facts | |
| What Explains the Widened Spreads: Known Vulnerabilities or the Convergence Criteria Checklist? | |
| Banking Sector Holds a Key to the Recovery from the Crisis | |
| Policy Implications | |
| References | |
| Boxes | |
| 1. | Has the Financial Crisis Impaired Monetary Transmission in the Euro Area? |
| 2. | Growth Prospects in Emerging Europe After the Global Crisis |
| 3. | A Case Study in Coordination: Deposit Guarantee |
| 4. | Redesigning Financial Supervision in the European Union |
| 5. | Sovereign Financing Needs of Advanced Economies and the Rollover Risk |
| 6. | Is the Stability and Growth Pact an Obstacle to Adequate Fiscal Stabilization? |
| 7. | Crisis Duration Across Emerging Market |
| Tables | |
| 1. | European Countries: Real GDP Growth and CPI Inflation, 2006–10 |
| 2. | European Countries: External and Fiscal Balances, 2006–10 |
| 3. | IMF Support for European Countries Affected by the Global Crisis |
| 4. | Headline Support for the Financial Sector and Up-Front Financing Need |
| 5. | Advanced European Economies: Estimated Cost of Discretionary Measures, 2008–10 |
| 6. | Ranges of Fiscal Multipliers Used by IMF Country Teams |
| 7. | The Case for Fiscal Stimulus: Effects of Fiscal Stimulus Under Distressed Financial Markets |
| 8. | Coordination Gains: Cumulated Effects of Fiscal Stimulus on a Large Euro Area Country |
| 9. | Sovereign Spreads: Estimated Panel Regression |
| 10. | Solvency Concerns Increases Risk Premiums Thereby Reducing the Effectiveness of Fiscal Stimulus |
| 11. | A Snapshot of Emerging Markets |
| 12. | Did the Convergence Criteria Matter? |
| 13. | Correlation with Loan Loss Provisions |
| 14. | Banks in Emerging Europe Were Imprudent in the Past |
| 15. | Consumption Growth Is Correlated with Credit Growth |
| 16. | Consumption Growth Depends upon Credit Growth |
| Figures | |
| 1. | Euro Area: Contribution to Growth, 2006–08 |
| 2. | Selected European Countries: Headline and Core Inflation, January 2006–February 2009 |
| 3. | iTraxx Credit Default Swap Europe Financials’ Index, March 2007–April 2009 |
| 4. | Generalized Impulse Response Functions: Rate of Growth of Real GDP in Response to Negative Standard Error Shock to U.S. Equity Price Growth Rate |
| 5. | Estimating Shifts in the Global Price of Risk, 2007–March 2009 |
| 6. | Selected European Countries: Growth of Real Credit to Private Sector, 2006–January 2009 |
| 7. | Europe, Asia, and United States: Value of Trade, 1995-2007 |
| 8. | Trade and Financial Integration Within Europe |
| 9. | Euro Area and United Kingdom: Liquidity Premium, 2007-April 2009 |
| 10. | Government Support, Including Guarantees, to Banks, 2008-09 |
| 11. | New Member States: Country-Specific Components of Sovereign Spreads, September 2008-January 2009 |
| 12. | Key Short-Term Indicators |
| 13. | Selected Advanced Economies: Break-Even Inflation, 2007-April 2009 |
| 14. | Germany, France, and Italy: Trade and GDP, 1991-2008 |
| 15. | Advanced European Economies: Estimated Impact of Automatic Stabilizers on Fiscal Balances, 2008-09 |
| 16. | Advanced European Economies: Fiscal Revenues During Episodes of House and Equity Price Busts |
| 17. | Projected Changes in Public Debt |
| 18. | Selected Euro Area Countries: Sovereign Spreads and Financial Institutions' Expected Default Probabilities, 2008-January 2009 |
| 19. | Estimated Common Component in Sovereign Spreads, 2001-January 2009 |
| 20. | Contributions to the Change in Spreads |
| 21. | EMBIG Spreads, 2005-November 2008 |
| 22. | Spreads and Banking System Characteristics |
| 23. | Residuals from the Fixed Effects Regression for Sovereign Spreads, January 2001-October 2008 |