Europe is going through a deep recession, driven by a collapse in confidence and global demand, and by adverse feedback effects between its financial system and the real economy. Unprecedented policy actions have brought about a measure of stability and cushioned the downturn. However, establishing a solid economic recovery will require additional and effectively coordinated policy interventions. The crisis provides an opportunity to strengthen economic and financial integration in Europe, including by strongly supporting emerging economies, that should not be missed.
This chapter was prepared by Kamil Dybczak, Carlos Mulas Granados, and Ezgi Ozturk with inputs from Vizhdan Boranova, Karim Foda, Keiko Honjo, Raju Huidrom, Nemanja Jovanovic and Svitlana Maslova, under the supervision of Jörg Decressin and the guidance of Gabriel Di Bella. Jaewoo Lee and Petia Topalova provided useful advice and comments. Nomelie Veluz provided administrative support. This chapter reflects data and developments as of September 28, 2020.
Bertrand Gruss (co-lead), Carlos Mulas-Granados, Manasa Pat-nam (co-lead), and Sebastian Weber prepared this chapter under the supervision of Enrica Detragiache and the guidance of Jeffrey Franks. Zan Jin provided excellent research support.
On the heels of the global financial crisis, active fiscal policy is back on the agenda of the advanced European economies. Indeed, a fiscal expansion could be particularly effective in the near-term economic environment: the recent tightening of credit constraints could make spending more sensitive to current income and, thus, taxes and subsidies. Given the increased integration of European economies, policy coordination is nonetheless key to magnifying the effects of national fiscal expansions. While it is important for countries to support their economies in the face of this unprecedented slowdown, a clear and credible commitment to long-run fiscal discipline is now more essential than ever: any loss of market confidence may raise long-term real interest rates and debtservice costs, partly offsetting the stimulus effects of measures taken to deal with the crisis and further adding to financing pressures. Hence, it is particularly crucial that any short-term fiscal action be cast within a credible medium-term fiscal framework and envisage a fiscal correction as the crisis abates.
Christian Ebeke (co-lead), Nemanja Jovanovic, Svitlana Maslova, Francisco Parodi, Laura Valderrama (co-lead), Svetlana Vtyurina, and Jing Zhou prepared this chapter under the supervision of Mahmood Pradhan and the guidance of Laura Papi and Petia Topalova. Jörg Decressin provided useful advice and comments. Jankeesh Sandhu provided outstanding research assistance, and Nomelie Veluz was expertly in charge of administrative support.
A short period of apparent resilience to the global financial turmoil has given way to a deep crisis in several European emerging markets, though with substantial differentiation across the region. The crisis has put an increased premium on sound macroeconomic and macroprudential policies: countries with lower inflation, smaller current account deficits, and lower dependence on bank-related capital inflows in recent years have so far fared better. While the external environment and structural reform efforts will matter, the banking sector, which has played a central role in the run-up to the crisis, holds a key to the speed of recovery from the crisis. In the short term, bank recapitalizations seem unavoidable to prevent recessions from becoming protracted. In the medium term, recovery efforts need to be supported by a strengthening of financial stability arrangements, including for cross-border activities, and the introduction of more forward-looking provisioning policies.
The capital needs that will enable Eastern Europe to catch up to EC standards of living are assessed within the framework of a constant elasticity of substitution production function. This function, parameterized on the EC, is assumed to apply, with certain inefficiency factors, to Eastern Europe in 1992. Quantitative results, given the heroic assumptions required, are bounded by large ranges. The approach provides a framework for assessing the factors that will determine future capital needs in Eastern Europe and underscores the crucial role of efficiency gains in this process.