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International Monetary Fund. European Dept.

Abstract

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.

International Monetary Fund. European Dept.

Abstract

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.

International Monetary Fund. European Dept.

Abstract

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.

International Monetary Fund. European Dept.

Abstract

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.

International Monetary Fund. European Dept.

Abstract

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?

International Monetary Fund. European Dept.

Abstract

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?

Mr. Bas B. Bakker and Mr. Christoph A Klingen

Abstract

Since the onset of transition in the early 1990s, emerging Europe has seen impressive progress. In a span of less than 20 years, the region went from central planning to successful market economies (Åslund, 2007). Institutions were modernized, often in the context of an EU accession process. Foreign direct investment poured in to benefit from highly skilled labor available at low cost. Great strides were made toward trade and financial integration with western Europe.

Mr. Bas B. Bakker and Mr. Christoph A Klingen

Abstract

The growth of the Serbian economy before the global financial crisis was respectable, but external vulnerabilities were allowed to proliferate. When the crisis unfolded, the authorities quickly approached the IMF. A stand-by arrangement and a bail-in agreement with foreign banks helped stave off financial instability. Large, front-loaded fiscal adjustment created room for automatic fiscal stabilizers to operate through the remainder of the crisis period, and a significant real depreciation restored external cost competitiveness. These successes notwithstanding, the crisis exposed deep flaws in Serbia’s consumption-based growth model. Politically painful structural reforms will be needed to shift to a more sustainable growth model that keeps wages competitive while raising savings and exports.

Mr. Bas B. Bakker and Mr. Christoph A Klingen

Abstract

After tardy reform efforts in the first decade of transition, Romania’s growth took off in the early 2000s as a critical mass of reforms combined with firm EU membership prospects. But these fundamentals were overlaid with a domestic demand and credit bubble, readily financed by foreign parent banks flush with liquidity. Fiscal and public wage policies only added to the problem, while countercyclical efforts in the monetary and macroprudential areas had little effect. The resulting large current account deficits and banking sector vulnerabilities set Romania up for a hard landing as the global financial crisis unfolded. Difficulties in financing the rapidly widening fiscal deficit ultimately prompted the authorities to request and receive large-scale financial assistance from the IMF and the European Union. The €20 billion program of May 2009 was successful in restoring macroeconomic stability, forestalling a banking crisis, and correcting external imbalances. Following the 2009 recession, recovery was slower to take hold than elsewhere, but Romania’s economy expanded by 2½ percent in 2011. These achievements and ongoing reforms, especially in the structural area, hold the promise of convergence with living standards in the rest of the European Union better grounded in fundamentals.

Mr. Bas B. Bakker and Mr. Christoph A Klingen

Abstract

Poland fared far better than most of its emerging European neighbors during the global financial crisis. It is the only EU economy to have escaped outright recession, helped by resilient domestic demand and more limited exposure to the decline in world trade. Perhaps most importantly, Poland entered the crisis with relatively low imbalances, and it had space to implement countercyclical policies to cushion the downturn. Early adoption of a Flexible Credit Line (FCL) arrangement with the IMF provided further cover, lifted investor confidence, and helped maintain access to international capital markets.