Front Matter

Front Matter

Author(s):
International Monetary Fund. European Dept.
Published Date:
November 2017
Share
  • ShareShare
Show Summary Details

World Economic and Financial Surveys

Regional Economic Outlook

Europe

Europe Hitting Its Stride

17 Nov

©2017 International Monetary Fund

Cataloging-in-Publication Data

Names: Decressin, Jörg. | International Monetary Fund. European Department. | International Monetary Fund.

Title: Europe : Europe hitting its stride.

Other titles: Europe hitting its stride. | Regional economic outlook. | World economic and financial surveys.

Description: [Washington, DC] : International Monetary Fund, 2017. | Regional economic issues | World economic and financial surveys | Nov 2017. | Prepared by the staff of the IMF’s European Department under the general guidance of Jörg Decressin. | Includes bibliographical references.

Identifiers: ISBN 9781484319611 (paper)

Subjects: LCSH: Economic development—Europe. | Economic forecasting—Europe. | Judicial process—Europe. | Banks and banking—Europe.

Classification: LCC HC240.E87 2017

ISBN: 978-1-48431-961-1 (Paper)

ISBN: 978-1-48432-661-9 (Web PDF)

Please send orders to:

International Monetary Fund

Publication Services

P.O. Box 92780

Washington, DC 20090, U.S.A.

Tel.: (202) 623–7430 Fax: (202) 623–7201

publications@imf.org

www.bookstore.imf.org

www.elibrary.imf.org

Contents

Preface

The November 2017 Regional Economic Outlook for Europe was prepared by a staff of the IMF’s European Department under the general guidance of Jörg Decressin. Chapter 1 was prepared by a staff team including Cristina Batog, Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Faezeh Raei, and Yan Sun, and was led by Emil Stavrev. Chapter 2 was prepared by a staff team including Vizhdan Boranova, Raju Huidrom, Mariusz Jarmuzek, Martin Petri, Faezeh Raei, Tiberiu Scutaru, Ara Stepanyan, and Svetlana Vtyurina, and was led by Laura Papi. Chapter 3 was prepared by a staff team consisting of Ezequiel Cabezon, Dilyana Dimova, Patrick Gitton, Haonan Qu, Alaina Rhee, Ruud Vermeulen, and Jason Weiss, and was led by Bas Bakker and Jacques Miniane. The European Department country teams provided useful feedback to the report.

In addition, Georgia Babici, Nadeem Ilahi, Ricardo Llaudes, Pamela Madrid Angers, Francisco Parodi, Brett Rayner, Jason Weiss, and Ruifeng Zhang provided inputs to Chapter 2. The chapter benefited from discussions during the Croatia National Bank-IMF co-sponsored conference on the Role of Governance and Institutions held in Dubrovnik, Croatia, in July 2017 and the exchange of views with the Central, Eastern, and Southeastern European authorities during the IMF/World Bank October 2017 Annual Meetings in Washington, DC and their subsequent comments. Many colleagues from the Council of Europe, the European Commission, the European Bank for Reconstruction and Development, the World Bank, and the Fund provided helpful comments and suggestions. Chapter 3 benefited from the data provided by non-EU Western Balkan country teams and discussions with the non-EU Western Balkan authorities during the 2017 Annual Meetings.

Administrative support was provided by Gilda Ordoñez-Baric. Colleagues of the Communications Department Marjorie Henriquez, Wiktor Krzyzanowski, David Pedroza, and Rhoda Weeks provided invaluable support, and Linda Long coordinated editing and production, with editing help from David Einhorn and Lucy Morales. Heidi Grauel performed layout services.

Approved by Poul M. Thomsen.

Abbreviations

The following abbreviations are used:

ALB

Albania

AUT

Austria

BGR

Bulgaria

BiH

Bosnia and Herzegovina

BIS

Bank for International Settlements

BLR

Belarus

CBK

Central Bank of Kosovo

CE

Central Europe

CEE

Central and Eastern Europe

CEPEJ

European Commission for the Efficiency of Justice

CESEE

Central, Eastern, and Southeastern Europe

CHE

Switzerland

CIS

Commonwealth of Independent States

CoE

Council of Europe

CSO

Civil society organization

CVM

Cooperation and Verification Mechanism

CYP

Cyprus

CZE

Czech Republic

DEU

Germany

DNK

Denmark

EA

Euro Area

EBRD

European Bank for Reconstruction and Development

EC

European Commission

ECB

European Central Bank

EFF

Extended Fund Facility

EIB

European Investment Bank

EM

Emerging market

EMBIG

Emerging Markets Bond Index Global

EPFR

Emerging Portfolio Fund Research

ESP

Spain

EST

Estonia

EU

European Union

EU15

European Union-15

EMU

Economic and Monetary Union

FBiH

Federation of Bosnia and Herzegovina

FDI

Foreign direct investment

FIN

Finland

FRA

France

FSSA

Financial System Stability Assessment

FSI

Financial Soundness Indicators

FX

Foreign exchange

GBR

United Kingdom

GCI

Global Competitiveness Index

GDP

Gross domestic product

GFDD

Global Financial Development Database

GFSR

Global Financial Stability Report

GMM

General Method of Moments

GRC

Greece

GRECO

Group of States against Corruption

HICP

Harmonized Index of Consumer Prices

HRV

Croatia

HUN

Hungary

ICRG

International Country Risk Guide

IFS

International Financial Statistics

IMF

International Monetary Fund

ISL

Iceland

ISR

Israel

IRL

Ireland

ITA

Italy

JSRS

Justice System Reform Strategy

Latam

Latin America

LTU

Lithuania

LVA

Latvia

LUX

Luxembourg

MDA

Moldova

MFS

Monetary and Financial Statistics

MKD

Former Yugoslav Republic of Macedonia

MLT

Malta

MNE

Montenegro

NABU

National Anti-corruption Bureau of Ukraine

NDL

Netherlands

NOR

Norway

NPL

Nonperforming loan

NSF

National Salvation Front

OECD

Organisation for Economic Co-operation and Development

OFC

Other financial corporations

OHR

Office of the High Representative

OSCE

Organization for Security and Co-operation in Europe

OSI

Open Society Institute

PEA

Private Enforcement Agent

PMI

Purchasing Managers Index

PPP

Purchasing power parity

POL

Poland

PRT

Portugal

REI

Regional Economic Issues

ROU

Romania

RS

Republika Srpska

RUS

Russia

SA

Seasonally adjusted

SAP

Stabilization and Association Process

SCM

Superior Council of the Magistracy

SJC

State Judicial Council

SEE

Southeastern Europe

SEE-EU

Southeastern European EU member states

SEE-non-EU

Southeastern European non-EU member states

SMR

San Marino

SOE

State-owned enterprise

SRB

Serbia

SVK

Slovak Republic

SVN

Slovenia

SWE

Sweden

TFP

Total factor productivity

TPI

Third-party indicators

TUR

Turkey

UKR

Ukraine

UVK

Kosovo

USAID

United States Agency for International Development

V-Dem

Varieties of Democracy Institute

WB

World Bank

WDI

World Development Indicators

WDR

World Development Report

WEF

World Economic Forum

WEO

World Economic Outlook

WGI

Worldwide Governance Indicators

Regional Economic Outlook

Europe: Country Groups

Note: Country weights are based on 2016 GDP in purchasing-power-parity terms. The country groups are color coded, and the weights refer to the respective group. EU = European Union. The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. In this report, statistical data on Crimea and the City of Sevastopol are included as part of the data for Russia.

Europe: Country Groups and Weights (2016)

Note: Country weights are based on 2016 GDP in purchasing-power-parity terms. The country groups are color coded, and the weights refer to the respective group.

Executive Summary

Europe’s strengthening and broadening recovery …The European recovery is strengthening and broadening appreciably. Real GDP growth is projected at 2.4 percent in 2017, up from 1.7 percent in 2016, before easing to 2.1 percent in 2018. These are large upward revisions—0.5 and 0.2 percentage point for 2017 and 2018, respectively—relative to the April World Economic Outlook. The European recovery is spilling over to the rest of the world, contributing significantly to global growth. In a few advanced and many emerging economies, unemployment rates have returned to precrisis levels. Most emerging market European economies are now seeing robust wage growth. In many parts of Europe, however, wage growth is sluggish despite falling unemployment.
… is contributing significantly to global growth.
Risks are more balanced now, but tilted to the downside in the medium term.Risks appear more balanced over the near term, but are still tilted to the downside over the medium term. The recovery may be stronger than projected in the short run. But the sustainability of the rebound remains in question. Over the longer term, adverse demographic trends and subdued productivity are likely to hold back growth. The outlook is also subject to several important domestic and external downside risks.
Policymakers should take advantage of the recovery.Policymakers should take advantage of the improved prospects to rebuild fiscal buffers and enhance the economy’s capacity to grow and absorb shocks. Many advanced and market emerging economies need to reduce still-elevated fiscal deficits in a growth-friendly way. This task is particularly important for those with high public debt, as interest rates will likely rise over time. For countries with stronger fiscal positions, available space should be used to lift growth potential and support structural reforms. For now, monetary policy can stay accommodative in most of Europe, given subdued inflation pressures. But where wages have accelerated, central banks should be ready to gradually withdraw stimulus to keep inflation expectations firmly anchored.
Reduce fiscal deficits where debt is high and support long-term growth where fiscal positions are strong.
Keep monetary policy accommodative in most countries.
Structural policies need to reinvigorate convergence, which has slowed since the crisis, and increase growth potential. Priorities differ across countries.
Advance structural reforms to raise productivity and deal with crisis legacies.For many advanced economies, faster progress on structural reforms is needed to raise productivity growth, for example, by making product markets more competitive and improving labor markets as well as education and training. Regarding crisis legacies, cleaning up the balance sheets of weak banks remains a priority.

More needs to be done to strengthen the European Union, notably the resilience of the euro area to shocks. This requires completing the banking and capital markets unions and building a euro area fiscal capacity to provide a macroeconomic stabilization mechanism. In parallel, action is needed to resolve banking sector legacies and strictly implement the common fiscal rules.

In emerging market economies, the business environment should be further improved. After a period of rapid catch-up, countries in the region have generally seen a significant slowdown in convergence with their more advanced peers in Europe. To reaccelerate convergence, the focus should be on the next generation of reforms, especially reforms of institutions and governance.
Institutions and governance are key for productivity and inclusive growth.Institutions are key for growth, and the legal framework is a critical institution and a vital element of the business environment. Strong institutions are conducive to a level playing field that promotes competition, help retain and attract skilled people, and ensure that growth is inclusive and sustainable. Based on the experience of Central, Eastern, and Southeastern Europe in the past 25 years, Chapter 2 offers some insights on how countries could improve the effectiveness of their judiciary. Much progress was achieved, but setbacks also happened. A more equal distribution of resources and opportunities, stronger state capacity, and greater transparency resulted in more independent, impartial, and efficient justice systems. The European Union and the Council of Europe helped catalyze reforms, but their durability depended more on domestic factors. Moving forward, reforms should focus on strong competition policies, lower trade and entry barriers, and redistributive fiscal policies that expand opportunities. Public officials need to be selected and promoted strictly on merit. Besides guaranteeing freedom of information, transparency can be enhanced by providing information on government performance, the use of public resources, financial interests, and ownership structures.
Improving resource distribution, state capacity, and transparency fosters more effective justice systems.
Reducing high NPLs via supervisory action, enhanced bankruptcy and insolvency regimes, and speeding up court procedures will help boost credit and growth in the Western Balkans.Chapter 3 discusses the specific banking challenges facing the Western Balkan economies. In many ways, banks in this region are still reeling from the effects of a boom and bust credit cycle. This legacy is constraining credit growth at a time when it is most needed. In most countries in the region, credit-to-GDP ratios are still below their potential and show little sign of improvement. Policymakers should act on several fronts. Nonperforming loans can be reduced and profitability increased through asset quality reviews and supervisory action plans. Funding bases can be enhanced through better communication with parent banks and home supervisors and by diversifying funding sources. Addressing weak bankruptcy and insolvency regimes, improving cadastral systems, and speeding up slow court procedures should help ease the structural impediments to credit growth.

    Other Resources Citing This Publication