With strong policy action to contain sovereign debt problems in the euro area, the recovery continues. But lingering uncertainties and market pressures make for moderate and unequal growth across advanced Europe. In the short term, in addition to dealing with weak banks and supportive monetary policy, this calls for credible fiscal consolidation, adjusted to country needs and designed to minimize the impact on growth. It will be just as important to address the governance issues revealed by the crisis. Better fiscal frameworks at the national and the EU levels will enhance the credibility of fiscal adjustment. And energizing and coordinating structural policies should help sustain and balance growth, supporting public finances in the longer term. Although the political economy of such reforms is complicated, they promise a much stronger Europe. Policymakers should seize the moment and act boldly.
Emerging Europe (EE)7 is recovering from its deepest recession in the post-transition period. GDP in the region is likely to grow by 3.9 percent in 2010 and 3.8 percent in 2011—a marked difference from the 6 percent contraction in 2009. The recovery is export-led, while domestic demand remains subdued, particularly in countries where the deflation of precrisis asset and credit booms has been most severe. Policymakers in emerging Europe face the difficult challenge of dealing with the legacies of the crisis, while not hurting the recovery. Fiscal consolidation is needed to bring down fiscal deficits, which rose sharply during the crisis, and remain high in 2010. To a large extent, these deficits are structural: although headline deficits were low in most countries before the crisis, a temporary boom in revenues masked the underlying deterioration that resulted from rapid expenditure growth. Beyond the short term, the region will need to find new growth engines, as the capital flows-driven domestic demand boom needs to give way to more balanced growth. In sum, the region faces difficult adjustments in the short term, but the adjustments will help set the stage for a more durable catch-up with advanced Europe.
Two years after the collapse of Lehman Brothers, emerging Europe22 has begun its recovery from its deepest post-transition recession. While the recovery remains uneven and export-led (Chapter 2), the banking and currency crises that many initially feared have largely been avoided. This chapter addresses three questions: Why was emerging Europe so severely affected by the global crisis? Why were the banking and currency crises that many had feared avoided? What lessons for crisis prevention can be drawn from the boom-bust cycle?
Large current account imbalances have been recorded in the Baltics, Russia, and other countries of the former Soviet Union since their independence. Are these current account positions sustainable, reflecting the special circumstances of transition, or are the positions untenable over the longer term? This study attempts to address this important question by first describing recent current account developments in these transition economies. It subsequently focuses on a wide range of external sustainability indicators by drawing on the existing literature, and attempts to assess their potential usefulness in a transiton country context. The indicators examined include real exchange rates, fiscal revenues and expenditures, savings and investment developments, openness measures, growth projections, external debt composition, foreign exchange reserve cover, and various financial sector measures.
International Monetary Fund. External Relations Dept.
Member country use of IMF resources decreased in 1999, to SDR 10.8 billion (about $14.7 billion) from SDR 21.5 billion ($29.3 billion) in 1998, as member country economies recovered from the severe crises that had affected many regions in 1998. While lending under all facilities decreased in 1999, several member countries received large disbursements during the year. Brazil received the largest disbursement of any member, under the Supplemental Reserve Facility, for SDR 3.6 billion ($4.9 billion) and also SDR 814.1 million ($1.1 billion) under a Stand-By Arrangement. Mexico received the largest disbursement under a Stand-By Arrangement, SDR 1.04 billion ($1.4 billion). Disbursements under the Extended Fund Facility (EFF) were dominated by drawings totaling SDR 1.0 billion ($1.4 billion) by Indonesia. Nicaragua received the largest disbursement under the Poverty Reduction and Growth Facility (PRGF), for SDR 78.3 million ($106.7 million).
Emerging Europe was particularly hard hit by the global financial crisis, but a concerted effort by local policymakers and the international community staved off impending financial meltdown and laid the foundations for renewed convergence with western Europe. This book, written by staff of the IMF's European Department that worked on the region at the time, provides a unique account of events: the origins of the crisis and the precrisis policy setting; the crisis trigger and the scramble to avoid the worst; the stabilization and recovery; the remaining challenges; and the lessons for the future. Five regional chapters provide the analytics to put events into perspective. Dedicated chapters for all 19 countries of the region dig deeper into the idiosyncrasies of each economy and provide extensive economic data. A final chapter distills the lessons from the overall regional experience and the wide intraregional diversity. Taken together, they make this book an indispensible reference for economic scholars of the region and beyond.
The virulence of the financial crisis in Asia and the continuing crisis in Russia highlight the importance of assessing the sustainability of a country’s current account balance, and, more generally, its vulnerability to external crisis.1 It is not surprising, therefore, that many previous assessments of external sustainability have been undertaken for a variety of industrial and emerging market economies. To date, however, very few such studies have focused on transition economies.
Current account developments in the Baltics, Russia, and other countries of the former Soviet Union since independence are covered comprehensively in Kapur and van der Mensbrugghe (1997).6 This section highlights the main features of such developments as a backdrop to the analysis of current account sustainability indicators in these countries. Many issues raised in this section are covered in more depth in Section III, where individual indicators are examined.
Previous studies have investigated the potential usefulness of current account or, more broadly, external sustainability indicators. Recent papers that examine the effectiveness of a variety of indicators in predicting current account/external crises in both industrial and emerging economies include Milesi-Ferretti and Razin (1996); Kaminsky and Reinhart (1996); Goldstein (1997); Kaminsky, Lizondo, and Reinhart (1998); and IMF (1998). Roubini and Wachtel (1997) is the only paper to date that concentrates on current account sustainability in a wide variety of transition economies.