Front Matter

Front Matter

Author(s):
International Monetary Fund. European Dept.
Published Date:
November 2017
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    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:

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    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

    Generalized 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.
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