Europe
Regional Economic Outlook: Europe
October 2010
World Economic and Financial Surveys
Building Confidence
The recovery in Europe continues, supported by strong policy action to contain sovereign debt problems in the euro area. In advanced Europe, lingering uncertainties and market pressures make for moderate and unequal growth, creating challenges for macroeconomic and financial sector policies. The REO also sheds light on the governance issues revealed by the crisis, arguing that better policy frameworks, in particular at the euro area level, promise a stronger Europe. For the first time, the REO devotes a separate chapter to the outlook for emerging Europe, where, after a deep recession, an export-led recovery is under way. However, the rebound is uneven across the region, and policymakers face the difficult challenge of dealing with the legacies of the crisis, while not hurting the recovery. Beyond the short term, the REO argues that the region will need to find new growth engines, as the capital inflows-driven and credit-fueled domestic demand boom needs to give way to more balanced growth. Indeed, the REO emphasizes that active fiscal policy and coordinated prudential measures are key to avoiding a repeat of the boom-bust cycle the region has just endured. |
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Contents
| 1. | Advanced Europe: Beyond Crisis Management |
| The Recovery Continues | |
| Policies to Sustain the Upswing | |
| Steps to Complete the European House | |
| 2. | Emerging Europe: Toward Self-Sustained Growth |
| Outlook for 2010 and 2011 | |
| What Can Policymakers Do to Sustain the Recovery and Minimize Risks? | |
| 3. | Emerging Europe and the Global Crisis: Lessons from the Boom and Bust |
| How the Global Financial and Economic Crisis Affected Emerging Europe—A Narrative | |
| Why Was a Meltdown Avoided? | |
| Lessons for Crisis Prevention | |
| Conclusions | |
| References | |
| Boxes | |
| 1. | Fiscal Consolidation: Minimizing Side Effects |
| 2. | Toward a More Integrated Financial Stability Framework for the EU |
| 3. | Why Is Economic Growth Lagging in Europe and What Can Be Done About It? |
| 4. | Emerging Europe Trade Linkages: The Pull from Within? |
| 5. | Why Is Credit Growth Weak—Demand or Supply? |
| 6. | Financial Sector Levies in Europe |
| 7. | Banking Problems in Emerging Europe during 2008–09 |
| 8. | IMF-Supported Programs |
| 9. | European Bank Coordination Initiative (“Vienna Initiative”) |
| 10. | Emerging Europe Crisis Compared with Previous Emerging Market Crises |
| 11. | Foreign Currency Mortgages, Maturity Mismatches, and Foreign Currency Shortages: The Cases of Hungary and Poland |
| Tables | |
| 1. | European Countries: Real GDP Growth and CPI Inflation, 2007–11 |
| 2. | Selected Countries: Net Exposure of Banks to Sovereign Debt as Reported in CEBS Stress Test, March–July 2010 |
| 3. | Advanced European Countries: Main Macroeconomic Indicators, 2007–11 |
| 4. | Emerging Europe: Real GDP, Domestic Demand, Exports, and Private Consumption, 2009–11 |
| 5. | Emerging Europe: CPI Inflation and Current Account Balance, 2009–11 |
| 6. | Emerging Europe: Evolution of Public Debt and General Government Overall Balance, 2007–11 |
| 7. | Emerging Europe: Selected Financial Soundness Indicators, 2007–09 |
| 8. | Emerging Europe: Exports of Goods, 1995–2007 |
| 9. | Emerging Europe: Direction of Exports, 2007 |
| 10. | Emerging Europe: General Government Overall Balance |
| 11. | Emerging Europe: Gross International Sovereign Bond Issuance, 2008:Q1–2010:Q1 |
| 12. | Emerging Europe: Volume of International Syndicated Loans Issuance to Banks in 2008 |
| 13. | External Positions of Western Banks vis-à-vis Emerging Europe |
| 14. | Emerging Europe: Domestic Currency Deposits, Oct 2008–Mar 2009 |
| 15. | Emerging Europe: Exchange Rate Pressure Index, September 2008–May 2009 |
| 16. | Financing Packages for Emerging European Countries Under IMF-Supported Programs |
| Figures | |
| 1. | Euro Area: Contribution to Growth, 2006:Q1–2010:Q2 |
| 2. | Selected European Countries: Conditional Standard Deviation of Changes in 5-Year Sovereign CDS Spreads, January 2008–August 2010 |
| 3. | Selected European Countries and the United States: Real GDP, 2006:Q1–2011:Q4 |
| 4. | Selected European Countries: Key Short-Term Indicators |
| 5. | Euro Area: Financial Conditions Index, January 2003–August 2010 |
| 6. | Selected European Countries and the United States: Unemployment Rate, January 1999–August 2010 |
| 7. | Selected European Countries: Headline and Core Inflation, January 2006–August 2010 |
| 8. | Euro Area Countries: Sovereign and Banking Sector 5-Year CDS Spreads, 2007–10 |
| 9A. | Euro Area: Real Bank Credit and GDP Growth, 2000:Q12010:Q2 |
| 9B. | Euro Area: Bank Loans and Bond Issuance, 2000:Q1–2009:Q4 |
| 10. | Selected Countries: Central Banks’ Total Assets, January 2007–August 2010 |
| 11. | Selected Advanced European Countries: Changes in General Government Fiscal Deficits, 2010–13 |
| 12. | Euro Area: Structure of Expected Fiscal Consolidation, 2010–13 |
| 13. | Selected Countries: Structural Indicators |
| 14. | Selected Countries: Product and Labor Regulation and Employment Growth Simulations |
| 15. | Trade Imbalance as Fraction of Total Bilateral Trade, 1948–2008 |
| 16A. | Euro Area: Bilateral Trade Deficits and Regulatory Differences in Employment Protection, 2003 |
| 16B. | Euro Area: Bilateral Trade Deficits and Regulatory Differences in Product Market Regulation, 2005 |
| 17. | Selected Euro Area Countries: Taylor Rule Implied Rates and Actual Policy Rate, 1999:Q1–2009:Q4 |
| 18. | Emerging Europe: Real GDP Growth |
| 19. | Emerging Europe: Real GDP, 2008:Q3–2010:Q2 |
| 20. | Emerging Europe: Real Exports, 2008:Q3–2010:Q2 |
| 21. | Emerging Europe: Real Domestic Demand, 2008:Q3–2010:Q2 |
| 22. | Emerging Europe: Real Investment, 2008:Q3–2010:Q2 |
| 23. | Emerging Europe: Real Private Consumption, 2008:Q1–2010:Q2 |
| 24. | Emerging Europe: Contributions to Year-over-Year GDP Growth, 2010:Q1 |
| 25. | Emerging Europe: Gross Real Wage Growth |
| 26. | Emerging Europe: Unemployment Rate |
| 27. | Emerging Europe: Confidence Indicators |
| 28. | Emerging Europe: GDP Growth 2009 vs. 2010–11 |
| 29. | Emerging Europe: Precrisis Real Expenditure and Revenue Growth, 2003–08 |
| 30. | Selected Regions: Deterioration of Public Finances |
| 31. | Emerging Europe: Financial Markets and Fiscal Vulnerabilities |
| 32. | Emerging Europe: Fiscal Adjustment, 2010–13 |
| 33. | Emerging Europe: Composition of Adjustment Plans, 2010–13 |
| 34. | Emerging Europe: Loan Loss Provisions |
| 35. | Emerging Europe: Provisions and Loan Loss Reserves |
| 36. | Emerging Europe: Holdings of Government Securities by Banks, 2009 |
| 37. | Emerging Europe: Precrisis Real GDP Growth and Contribution of Domestic Demand |
| 38. | Emerging Europe and Selected Regions: Real Per Capita GDP Growth, 1995–2007 |
| 39. | Emerging Europe: Domestic Demand Growth and GDP Growth, 2003–08 |
| 40. | Emerging Europe: Domestic Demand and Private Sector Credit Growth, 2003–08 |
| 41. | Emerging Europe: Change in Real Estate Prices, 2003–08 |
| 42. | Emerging Europe: Net Capital Flows, 2000–07 |
| 43. | Emerging Europe: Cumulative Net Capital Inflows, 2003–08 |
| 44. | Emerging Europe: Change in External Position of Western Banks and Private Sector Credit, 2003–08 |
| 45. | Emerging Europe: Consumer Price Inflation, 2006 and 2008 |
| 46. | Emerging Europe: Foreign Direct Investment Flow in Tradable and Nontradable Sectors, 2007 |
| 47. | Emerging Europe: Private Sector Credit and Housing Prices, 2003–08 |
| 48. | Emerging Europe: Total Private Sector Credit by Currency, 2008 |
| 49. | Emerging Europe: CDS Spreads |
| 50. | Emerging Europe: EMBI Spreads |
| 51. | Emerging Europe: Stock Market Indices |
| 52. | Emerging Europe: Net Capital Flows to Emerging Europe, 2003–09 |
| 53. | Emerging Europe: Reduction of Net Capital Flows during the Crisis of 2008–09 |
| 54. | Emerging Europe: Nominal Effective Exchange Rates |
| 55. | Emerging Europe: Real GDP Growth, 2008:Q3–2009:Q1 |
| 56. | Emerging Europe: Foreign Bank Ownership and Change in Net Capital Flows, 2008–09 |
| 57. | Emerging Europe: Change in Deposit Rate from August 2008 to Peak |
| 58. | Emerging Europe and Asia: Adjustment during the Crisis, 2007–09 |
| 59. | Emerging Europe: Average Real GDP Growth |
| 60. | Emerging Europe: Foreign Currency Loans to Households, 2008 |
| 61. | Emerging Europe: Private Sector Credit, 2003 and 2008 |
| 62. | Emerging Europe: Contribution to Change in Credit-to-GDP Ratio, 2003–07 |
| 63. | Emerging Europe: Cumulative Change in Real Domestic Demand and Real Fiscal Revenue, 2003–08 |
| 64. | Selected Countries: Cumulative Fiscal Savings Assuming a Cap of 10 Percent Real Increase in Public Expenditures |