Europe
Regional Economic Outlook: Europe
November 2007
World Economic and Financial Surveys
Strengthening Financial Systems
Strong fundamentals should allow Europe to weather financial turbulence relatively well. Nonetheless, growth is set to ease in 2008 in nearly all countries. Policymakers will need to deal up front with the financial market turmoil, while implementing fiscal consolidation and structural reforms, including in the financial sector, to address vulnerabilities, raise medium-term growth prospects, and deliver on the promise of convergence for emerging Europe. Three analytical chapters discuss reforms to strengthen Europe’s financial systems to allow advanced economies to benefit from innovation without incurring excessive risk and, in emerging economies, to manage rapid financial deepening and develop financial systems further. |
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Contents
| Foreword | |
| Executive Summary | |
| PART I | |
| Outlook: Through Financial Turbulence to Sustained Growth | |
| Strong Fundamentals Should Help Overcome Financial Turbulence | |
| Protracted Credit Market Tightening Would Add Downside Risk | |
| Policymakers Are Facing Unexpected Uncertainty | |
| Reforms Are Key to Sustaining Growth | |
| PART II | |
| Analytical Focus: Strengthening Financial Systems | |
| 1. | Tuning the Financial Systems of Advanced Economies |
| Overview | |
| Evolution of Financial Systems | |
| Quality of the Financial System Matters | |
| Garnering Benefits without Incurring Excessive Risks | |
| 2. | Managing Rapid Financial Deepening in Emerging Europe |
| Finance’s Role in Convergence | |
| Driving Safely at High Speed | |
| Preparing for the Curve Ahead | |
| 3. | Sustaining Financial Development in Emerging Europe |
| What Is the State of Financial Development? | |
| Which Factors Are Key? | |
| How Can Progress Be Sustained? | |
| References | |
| Tables | |
| 1. | European Countries: Real GDP Growth and CPI Inflation, 2006–08 |
| 2. | European Countries: External and Fiscal Balances, 2006–08 |
| 3. | Index of Economic Freedom: Ranking Compared with the Rest of the World, 2005 |
| 4. | Credit to Nonfinancial Corporations and Households, 2000–06 |
| 5. | Banks’ Exposure to Emerging Economies, 2006 |
| Figures | |
| 1. | Europe and the Rest of the World: Real GDP Growth, 2001–08 |
| 2. | Convergence in Europe and in the Rest of the World, 2001–06 |
| 3. | Euro Area: Average Interbank Offer Rates, July 25, 2007–October 3, 2007 |
| 4. | Change in Banking Sector Stock Prices, July 25, 2007–October 3, 2007 |
| 5. | Daily Stock Markets Indices, January 2005–October 2007 |
| 6. | Sovereign Spreads, July 25, 2007–October 1, 2007 |
| 7. | EU-27 Confidence Indicators, January 2005–September 2007 |
| 8. | European Regions: General Government Balance, 2003–08 |
| 9. | Emerging Europe: Monetary Conditions, 2000–06 |
| 10. | Emerging Europe: Credit Growth, 1999–06 |
| 11. | European Regions: Ratio of Current Account Balance to GDP, 2003–08 |
| 12. | External Debt, 2006 |
| 13. | Bank Credit to the Private Sector in Europe, 1995–06 |
| 14. | Financial Innovation in Europe, June 1995–June 2007 |
| 15. | Financial Integration in Europe, 1995–06 |
| 16. | Financial Index by Subindices, 1995 and 2004 |
| 17. | Interest Spread, 1995 and 2004 |
| 18. | Assets of Nonbank Financial Institutions, 1995 and 2006 |
| 19. | Stock Market Turnover, 1995 and 2005 |
| 20. | Outstanding Amount of Domestic Debt Securities Issued by Nonfinancial Corporations, 1995 and 2006 |
| 21. | Convergence in Europe, 2000–06 |
| 22. | Current Account Balances and Income Levels in Europe, 2006 |
| 23. | Convergence with and without Capital Inflows |
| 24. | Share of Foreign Assets and Liabilities in GDP, 2005 |
| 25. | Credit to Nonfinancial Corporations, 2000–06 |
| 26. | Credit to Households, 2000–06 |
| 27. | Productivity, Flexibility, and the Current Account |
| 28. | Speed of Credit Growth and House Prices, 2002–06 |
| 29. | Share of Foreign Currency Loans in Total Loans, 2006 |
| 30. | Impact of Confidence on the Relative Price of Nontradables |
| 31. | Asset Share of Foreign-Owned Banks, 2000 and 2005 |
| 32. | Two Stages of Convergence |
| 33. | Changing Composition of Production |
| 34. | Labor Market Rigidity and Speed of Credit Growth |
| 35. | Bank Credit to the Private Sector and Per Capita Income, 2006 |
| 36. | Outstanding Debt Securities, 2006 |
| 37. | Equity Market Turnover and Capitalization, 2006 |
| 38. | Institutional Investor Size, 2006 |
| 39. | Bank Credit and Institutional Quality |
| 40. | Institutional Quality Index, 2006 |
| 41. | Borrowers and Lenders Legal Rights Index, 2006 |
| 42. | Credit Information Index, 2006 |
| 43. | Corporate Governance (Compliance with OECD Principles), 2004 |
| 44. | Banking Reform and Interest Rate Liberalization Index, 2006 |
| 45. | Regulatory and Supervisory Power Index, 2003 |
| Boxes | |
| 1. | Why Was Europe Affected by the Collapse of the U.S. Subprime Mortgage Market? |
| 2. | Europe’s Economic Integration |
| 3. | Continued Relevance of Relationship-Based Lending in an Evolving Financial System |
| 4. | Financial Intermediation at Work in Denmark |
| 5. | Upgrading a Financial System: Italy’s Experience |
| 6. | Addressing Financial Speeding in Latvia |
| 7. | Rapid Financial Deepening: Lessons from Portugal |
| 8. | National versus Regional Exchange Markets: Implications for Emerging Europe |
| 9. | Developing the Government Securities Market |
| 10. | Institutional Quality, Corporate Governance, and Financial Development: The Case of Ukraine |