Europe's contraction is ending, but the recovery is fragile. Policymakers should look beyond the crisis to secure a durable upswing and address the threats to potential growth from the crisis and the continent's well-known structural rigidities. The report's analytical work stresses the uncertainty surrounding potential growth estimates, and the more volatile environment faced by emerging economies in a tightly integrated region. In the near term, this calls for measures to restore the financial sector to health and for continued macroeconomic support, while preparing for the exit from extraordinary interventions in a coordinated and transparent fashion. Higher longer-term growth through structural change will support the recovery, smooth the exit, and help emerging markets to adjust to lower capital inflows in the crisis' aftermath. Published biannually in May and October.
Potential output is falling in the aftermath of the crisis, although the extent of the drop is uncertain. Monetary policymakers should take into account the reduction in potential output and the surrounding uncertainty by clearly communicating their views on potential output and their intent to adjust as new information becomes available. This approach will help anchor expectations for inflation and limit the costs of policy mistakes. Fiscal policy has to absorb the double blow dealt by the crisis to potential growth and debt levels. Even under very benign assumptions about the path of potential output, the required fiscal adjustment will be large, suggesting that policymakers should err on the side of caution and start the necessary consolidation as soon as the state of the cycle allows.
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