THE economic downturn sparked by the financial crisis that began in mid-2007 has become a global, synchronized recession. Tighter financial conditions, falling wealth, and greater uncertainty have triggered a sharp decline in all types of demand. In parallel with the rest of the world, Europe has entered a deep recession, and there is a risk that it might become even worse.
This issue of F&D looks at the harsh toll of the crisis on both Europe’s advanced and emerging economies because of the global nature of the shocks that have hit both the financial sector and the real economy, and because of Europe’s strong regional and global trade links.
Marek Belka, Director of the IMF’s European Department, writes in our lead article that beyond the immediate need for crisis management, Europe must revisit the frameworks on which the European Union is based because many have been revealed to be flawed or missing. Most pressing is the need to overhaul the EU’s financial stability framework.
The crisis is also testing the new central and eastern European members of the EU. But in many respects, one key European institution has proved its mettle—the euro. Both Charles Wyplosz and Barry Eichengreen discuss the future of the common currency.
Also in this issue, IMF economists rank the current recession as the most severe in the postwar period; John Lipsky, the Fund’s First Deputy Managing Director, examines the IMF’s role in a postcrisis world; and Giovanni Dell’Ariccia assesses what we have learned about how to manage asset price booms to prevent the bust that has caused such havoc. In addition, we talk to Oxford economist Paul Collier about how to help low-income countries during the current crisis, while Donald Kaberuka, President of the African Development Bank, writes about how African policymakers can prepare to take advantage of a global economic recovery.