2. The Crisis and Potential Output
- International Monetary Fund. European Dept.
- Published Date:
- September 2009
Few doubt that the crisis will have a negative effect on economic growth in Europe beyond the short term, but considerable uncertainty prevails over its magnitude. For countries where the financial sector contributed heavily to economic growth before the crisis, a continuation of historical levels of trend growth may be difficult, while economies relying on strong capital inflows could suffer a dent in their long-term growth or convergence process. In the medium term, the time-varying component of potential growth could be negative in almost all advanced European countries. Emerging economies could see lower medium-term growth because of dwindling capital inflows and higher government debt levels. Hence, intensified structural reforms are crucial to alleviate some of these adverse effects on potential growth and, in many emerging economies, need to be complemented by a further strengthening of policy frameworks.