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World Economic and Financial Surveys

Regional Economic Outlook: Europe

Securing Recovery

October 2009

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Europe's contraction is ending, but the recovery is fragile. Policymakers should look beyond the crisis to secure a durable upswing and address the threats to potential growth from the crisis and the continent's well-known structural rigidities. The report's analytical work stresses the uncertainty surrounding potential growth estimates, and the more volatile environment faced by emerging economies in a tightly integrated region. In the near term, this calls for measures to restore the financial sector to health and for continued macroeconomic support, while preparing for the exit from extraordinary interventions in a coordinated and transparent fashion. Higher longer-term growth through structural change will support the recovery, smooth the exit, and help emerging markets to adjust to lower capital inflows in the crisis' aftermath. Published biannually in May and October.

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Contents

Executive Summary
 
1. Outlook: Beyond the Crisis
  Fragile Recovery
  Strong Policy Response
  Further Policy Action Required
 
2. The Crisis and Potential Output
  Worrying About an Unobservable
  Long-Term Effects
  Medium-Term Effects
  Policy Implications
 
3. Implications of the Fall in Potential Output for Macroeconomic Policies
  Crisis Impact on Monetary Policy
  Impact of the Crisis on Fiscal Policy
 
4. Policies in Emerging Economies for Coping with Heightened Risk During Recovery
  Facing a Riskier Environment
  Adverse Effects on the Path to Recovery
  Challenging Policymakers
  Policy Options
  Conclusions and Policy Implications
 
References
 
Boxes
1. Employment and Productivity Dynamics Around Recessions: Germany, Spain, and the United Kingdom
2. Asset Price Swings, Monetary Policy, and Prudential Policy: A European View
3. Currency Mismatches in Emerging Europe
4. Managing Fiscal Risks Stemming from Public Interventions to Support Financial Systems
5. Risks to Medium-Term Growth and Convergence in Emerging Europe
6. Effect of the Financial Crisis on Potential Growth in Western Europe
 
Tables
1. European Countries: Real GDP Growth and CPI Inflation, 2006–10
2. European Countries: External and Fiscal Balances, 2006–10
3. IMF Support for European Countries Affected by the Global Crisis
4. Gross Value-Added Growth and Contributions, 1980–95 and 1995–2005
5. Potential Output and Output Gaps in the Euro Area
6. Macroeconomic Performance Under Output Gap Uncertainty
7. Fiscal Adjustment Required in Response to Various Crisis Scenarios
8. Volatility of Shocks in the Euro Area versus Shocks in the Emerging Economy, Precrisis and Crisis
 
Figures
1. Euro Area: Contribution to Growth, 2006–09
2. Selected European Countries and the United States: Unemployment, January 1999–August 2009
3. Euro Area: Yield Curves and Equity Markets
4. Selected European Countries: Growth of Real Credit to Private Sector, January 2006–May 2009
5. Euro Area: Real Bank Credit and GDP Growth, 2000:Q1–2009:Q2
6. Selected European Countries: Headline and Core Inflation, January 2006–July 2009
7. Selected European Countries: Key Short-Term Indicators
8. Selected European Countries: Bankruptcies, 2005–09
9. Selected Countries: Employment Over the Business Cycle
10. Selected Countries: Central Banks' Total Assets, January 2007–August 2009
11. Selected EU Countries: Debt Level and Cumulative Fiscal Deficit
12. Selected Countries: Average Gross Value Added Growth, 1995–2005
13. Euro Area: Potential (Medium-Term) Growth with Different Methodologies, 1993:Q2–2009:Q1
14. Euro Area: "Real-Time" and "True" Output Gaps, 1993:Q1–2007:Q2
15. The Benefits of a Price Stability Commitment Under Output Gap Uncertainty
16. Selected European Countries: Policy Rates, 2007–09
17. Euro Area: Potential Output Scenarios, 1999–2014
18. Selected European Countries: Projected Changes in Public Debt
19. Selected European Countries: Required Improvement of Primary Balance
20. Selected European Countries: Bond Spreads–Level and Volatility, January 2006–June 2009
21. Selected European Countries: Quarterly Revisions in Fiscal Balance Forecast, 2004:Q1–2009:Q2
22. Selected European Countries: WEO Revisions in Projected Government Debt for 2010 in April 2009 over September 2008
23. Selected European Countries: Exchange Rate Volatility, 2004:Q1–2009:Q1
24. Emerging Economies Have Higher Volatility
25. Effect of the Crisis in the Emerging Economy
26. Limiting Discretionary Fiscal Policy Shocks in the Emerging Economy
27. Reacting to the Exchange Rate in the Emerging Economy