IMF Survey: Uneven Recovery, Debt Worries Cloud Europe's Outlook

May 12, 2011

  • Recovery continues in Europe but with big differences across countries in the region
  • European integration is delivering efficiency gains and stronger competitiveness
  • Better integration of European equity markets should be next step

The IMF is forecasting continued steady growth in Europe in its latest economic outlook for the region. But despite the recent strong performance in many euro area economies and in the region’s emerging markets, worries about high debt levels and weak banks in some countries dominate.

Uneven Recovery, Debt Worries Cloud Europe's Outlook

One of the most surprising elements of Europe’s recovery has been the export performance of some euro area countries, says Antonio Borges (photo: IMF)


The main challenges facing policymakers in Europe include the sovereign debt problems in Greece, Portugal, and Ireland, and the lack of progress in dealing with undercapitalized banks across the continent. In an interview, the director of the IMF’s European Department, Antonio Borges, discusses the main findings of the report.

IMF Survey online: How would you characterize the IMF’s outlook for Europe?

Borges: Although there are still plenty of challenges, the main message of the outlook is one of quiet confidence. Europe is doing well overall―both Western Europe and Eastern Europe―and our projections for the forthcoming months are actually quite positive.

However, at the same time there are big differences across Europe. Some countries are doing very well. Others are still growing modestly, and we are concerned with that.

IMF Survey online: Some of the countries in core Europe and in Scandinavia that are doing particularly well have seen their recoveries driven largely by exports. Will that continue?

Borges: One of the most surprising elements of the outlook for Europe is, indeed, the export performance of some of the core countries. Of course, Europe is benefiting from the general growth that is taking place throughout the world. But it also proves an important point: European integration is delivering efficiency gains that some countries are taking advantage of. Many European countries are now reorganizing their operations, using bases elsewhere in Europe to be more effective, and in that process they become more competitive. This is a source of strength.

"European integration is delivering efficiency gains that some countries are taking advantage of."

IMF Survey online: The IMF and European Union have just announced a support package for Portugal. Do the problems in Greece, Portugal, and Ireland threaten the recovery that is under way in the rest of the European Union?

Borges: The bad news is that there is still uncertainty with respect to these countries. The good news is that, today, there are programs underway, and there is a good chance that they will be successful, provided they are implemented as agreed. So if things remain on track, we will be able to manage this crisis, which after all affects only a small number of relatively small countries.

IMF Survey online: There is a still a lot of concern, though, about whether the debt levels, particularly of Greece, are sustainable. What is your take on that?

Borges: For all three countries, the challenges are significant. But they are taking steps to address them. In Greece, for example, the government has said that it has many assets which it can use to privatize, or to leverage additional finance. But there is no question that, one year after the program was agreed, we are at the worst moment where we have to bear all the costs of the adjustment without yet seeing the benefits in terms of economic growth in the immediate future.

IMF Survey online: In Central and Eastern Europe, a strong recovery is under way. Will it be sustained?

Borges: Most of the countries in Central and Eastern Europe are doing well. We should keep in mind that some of them have had significant crises not that long ago with very substantial adjustment required as a consequence. Those programs were successful. In fact, what has happened in Eastern Europe is a source of confidence, and a number of countries have recovered quickly.

"What has happened in Eastern Europe is a source of confidence."

So overall, the region is doing well―to such an extent that we are concerned some countries may be growing too fast. In these cases, we are now changing our focus to stability.

IMF Survey online: Your report points to the banking sector as a continued source of weakness. What is needed to address Europe’s weak banks?

Borges: Banks and the financial sector in general have been a source of concern throughout the world as a consequence of the financial crisis of 2008-2009. In other parts of the world, in the United States and Britain for instance, banks have made more progress than they have on the continent of Europe.

This is a concern because it need not be the case. It is possible―and important―to take some significant steps immediately. Banks need to be recapitalized. They need stronger balance sheets. There is plenty of capital in Europe and, in fact, countries that have already gone down this road have proven successful.

It would, for instance, be appropriate for strong banks to take over some weak banks elsewhere in Europe. Through a truly European solution to these problems, many of the current difficulties would disappear quickly.

"Banks need to be recapitalized. They need stronger balance sheets. There is plenty of capital in Europe and, in fact, countries that have already gone down this road have proven successful."

Ultimately, we need to move more rapidly towards a European framework to deal with the banking situation. We need a European resolution framework, and a better integrated regulatory and supervisory environment. Some steps have been taken, but we need a lot more.

IMF Survey online: What will it take to bring about robust job creation and a significant decline in unemployment?

Borges: A number of countries are now enjoying a significant boom. Germany, for example, has one of the lowest unemployment rates it has had for a long time. In fact, the recent crisis in Europe demonstrated an ability to deal with employment issues that is superior to what we have seen elsewhere, with the impact of the crisis on unemployment mitigated through innovative policies.

With sustained economic growth, more jobs will be created. We should not underestimate the need to improve labor markets, but overall the outlook remains positive.

IMF Survey online: The report highlights the need for greater integration across Europe to both address the current crisis and make Europe more resilient in the future. What are the most important steps Europe’s policymakers should take to achieve such an outcome?

Borges: The most interesting development in Europe is this extraordinary effort to integrate economically and financially. This is work in progress. As we move ahead, we discover new problems every day, some of which were not expected. So we develop solutions as we go along, which is challenging but also holds a lot of promise.

European monetary integration, as we now know, led to very large flows of credit from one country to another, which led to all these booms―in particular real estate bubbles. We need to master those developments a bit better, but also complement them with other flows of capital, in particular equity. That’s the next natural step. As these equity markets develop―as the debt markets have developed in the last few years―we will have a more balanced, better integrated, and more solid Europe.

This interview is an edited and shortened version of a video interview that was posted on the IMF’s website May 12.

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