Europe
Regional Economic Outlook: Europe
May 2010
Fostering Sustainability
A weak and uneven recovery is underway in Europe. Macroeconomic policies still support the upswing and extraordinary measures are underway to address the sovereign crisis. Now policymakers face the difficult balancing act between continuing their support for the economy and establishing a credible path to policy normalization. Priorities are large medium-term fiscal consolidations and, in the financial area, a shift from systemic support to interventions in individual financial institutions. Structural weaknesses also need to be addressed, including the revamping of financial sector regulation and supervision, improvements in the functioning of products and labor markets, and filling gaps in the euro area’s fiscal governance. For emerging Europe, policies that facilitate a reorientation of the sources of growth toward the export sector and attract healthy capital inflows are key conditions to restart income convergence. |
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Contents
| 1. | Outlook: Getting the Exit Right |
| Recovery in Low Gear | |
| Normalizing Policies | |
| From Exit to Restructuring | |
| 2. | Managing Capital Flows |
| Emerging Europe’s Diverging Policy Challenges | |
| Europe Was Different | |
| The Motivation for Precrisis Inflows | |
| Policy Implications | |
| Conclusions | |
| References | |
| Boxes | |
| 1. | IMF-Supported Programs and External Adjustment |
| 2. | Toward a New European Financial System |
| 3. | Current Account Imbalances in the Southern Euro Area |
| 4. | Prudential Measures to Stem the Tide of Capital Inflows in Emerging Europe |
| 5. | Which Prudential Tool Is Best at Managing the Financial Stability Risks of Capital Inflows? Answers from Model Simulations |
| 6. | Russia’s Capital Flows: Experience and Challenges |
| 7. | Financial Reform: An Opportunity for the New Member States |
| Tables | |
| 1. | European Countries: Real GDP Growth and CPI Inflation, 2006–10 |
| 2. | European Countries: External and Fiscal Balances, 2006–10 |
| 3. | Uses of Capital Inflows, 2000–07 |
| Figures | |
| 1. | The Great Contraction: What Drives Cross-Country Differences |
| 2. | Euro Area: Contribution to Growth, 2006–09 |
| 3. | Asset Prices Compared with Pre-Lehman Levels |
| 4. | Euro Area: Bond, Equity, and Money Markets |
| 5. | Key Drivers of the Expected Recovery, 2009–10 |
| 6. | Selected European Countries: Key Short-Term Indicators |
| 7. | Euro Area: Gross Investment Ratio of Nonfinancial Corporations, March 2000–September 2009 |
| 8. | Europe: Credit Indicators |
| 9. | Selected European Economies: Gross Household Savings Ratio, March 2000–September 2009 |
| 10. | Selected European Countries and the United States: Unemployment, February 1999–January 2010 |
| 11. | Selected European Countries: Headline and Core Inflation, January 2006–February 2009 |
| 12. | Selected European Economies: Monetary Aggregates and Multipliers, June 2006–February 2010 |
| 13. | European Economies: Cross-Country Standard Deviation of GDP Growth and Current Account Balance, 2000–14 |
| 14. | European Economies: Stabilizing Public Debts |
| 15. | The Volume and Composition of Capital Inflows, 2001–08: Emerging Europe Was Different |
| 16. | Emerging European Economies: Macroeconomic Performance by Region, 2001–09 |
| 17. | Composition of Capital Inflows in Central, Eastern, and Southeastern Economies (CESE), 2003:Q1–2009:Q3 |
| 18. | Structural Reforms and Capital Inflows |
| 19. | External Privatization Receipts and FDI |
| 20. | Countries Received Capital Inflows in Excess of Convergence Reasons |
| 21. | Capital Inflows and Nominal Exchange Rate Flexibility |
| 22. | Real Lending Rates and Nominal Exchange Rate Appreciation of the Currency |
| 23. | Capital Flows and Real Domestic Demand |
| 24. | Rising Share of FDI into the Financial Sector Was Associated with Higher Cross-Border Loans to Banks and Corporates and Credit Growth |
| 25. | Capital Inflows and Competitiveness |
| 26. | The Wage-Cost Gap Between Sectors and Labor Market Policies |
| 27. | Capital Inflows Did Not Seem to Respond to Capital Scarcity |
| 28. | Banking Indicators Displayed Systemic Stability |
| 29. | Return on Assets, 2007 |
| 30. | Currency Mismatch and Capital Inflows, 2007 |
| 31. | Capital Inflows and Restrictions on Capital Flows, 1995–2007 |
| 32. | Credit Default Swap Spreads, January 2008–March 2010 |
| Appendix Tables | |
| 1. | Capital Inflows Panel Regression |
| 2. | Policy Responses to Capital Inflows, 1993–2007 |