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World Economic and Financial Surveys

Regional Economic Outlook: Europe

Addressing the Crisis

May 2009

Europe is in a deep recession. Adverse feedback between the financial and real sectors and across borders is likely to delay the recovery and create downside risks. Unprecedented policies have been undertaken to address the crisis-but are they likely to be successful and sufficiently coordinated for a tightly integrated region? To restore trust and confidence in financial markets, additional and forceful action will be essential. Maintaining fiscal support should help soften the downturn, in particular if sustainability is supported by solid medium-term strategies and fiscal frameworks. To be effective, these policies require coordination across advanced and emerging economies. The report's analytical work underpins the link between fiscal sustainability, coordination, and effectiveness, and stresses that emerging markets have been affected differently by the crisis, with the quality of policies and external vulnerabilities being key factors.

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Contents

Press Points
Executive Summary
 
1. Outlook: Galvanizing Recovery
  Synchronized Recession
  Impromptu Policy Reaction
  Uncertain Outlook
  Calling for a Well-Articulated and Effectively Coordinated Policy Response
 
2. Fiscal Policy in Advanced Countries: Effectiveness, Coordination, and Solvency Issues
  Overview
  Fiscal Costs of the Crisis
  Making the Most Out of Fiscal Interventions
  Treasuring Fiscal Solvency
  Ensuring Fiscal Sustainability: Policy Options
  Conclusions and Policy Implications
 
3. European Emerging Economies in the Crisis: Impact and Recovery
  Who Got Hurt More? Stylized Facts
  What Explains the Widened Spreads: Known Vulnerabilities or the Convergence Criteria Checklist?
  Banking Sector Holds a Key to the Recovery from the Crisis
  Policy Implications
 
References
 
Boxes
1. Has the Financial Crisis Impaired Monetary Transmission in the Euro Area?
2. Growth Prospects in Emerging Europe After the Global Crisis
3. A Case Study in Coordination: Deposit Guarantee
4. Redesigning Financial Supervision in the European Union
5. Sovereign Financing Needs of Advanced Economies and the Rollover Risk
6. Is the Stability and Growth Pact an Obstacle to Adequate Fiscal Stabilization?
7. Crisis Duration Across Emerging Market
 
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. Headline Support for the Financial Sector and Up-Front Financing Need
5. Advanced European Economies: Estimated Cost of Discretionary Measures, 2008–10
6. Ranges of Fiscal Multipliers Used by IMF Country Teams
7. The Case for Fiscal Stimulus: Effects of Fiscal Stimulus Under Distressed Financial Markets
8. Coordination Gains: Cumulated Effects of Fiscal Stimulus on a Large Euro Area Country
9. Sovereign Spreads: Estimated Panel Regression
10. Solvency Concerns Increases Risk Premiums Thereby Reducing the Effectiveness of Fiscal Stimulus
11. A Snapshot of Emerging Markets
12. Did the Convergence Criteria Matter?
13. Correlation with Loan Loss Provisions
14. Banks in Emerging Europe Were Imprudent in the Past
15. Consumption Growth Is Correlated with Credit Growth
16. Consumption Growth Depends upon Credit Growth
 
Figures
1. Euro Area: Contribution to Growth, 2006–08
2. Selected European Countries: Headline and Core Inflation, January 2006–February 2009
3. iTraxx Credit Default Swap Europe Financials’ Index, March 2007–April 2009
4. Generalized Impulse Response Functions: Rate of Growth of Real GDP in Response to Negative Standard Error Shock to U.S. Equity Price Growth Rate
5. Estimating Shifts in the Global Price of Risk, 2007–March 2009
6. Selected European Countries: Growth of Real Credit to Private Sector, 2006–January 2009
7. Europe, Asia, and United States: Value of Trade, 1995-2007
8. Trade and Financial Integration Within Europe
9. Euro Area and United Kingdom: Liquidity Premium, 2007-April 2009
10. Government Support, Including Guarantees, to Banks, 2008-09
11. New Member States: Country-Specific Components of Sovereign Spreads, September 2008-January 2009
12. Key Short-Term Indicators
13. Selected Advanced Economies: Break-Even Inflation, 2007-April 2009
14. Germany, France, and Italy: Trade and GDP, 1991-2008
15. Advanced European Economies: Estimated Impact of Automatic Stabilizers on Fiscal Balances, 2008-09
16. Advanced European Economies: Fiscal Revenues During Episodes of House and Equity Price Busts
17. Projected Changes in Public Debt
18. Selected Euro Area Countries: Sovereign Spreads and Financial Institutions' Expected Default Probabilities, 2008-January 2009
19. Estimated Common Component in Sovereign Spreads, 2001-January 2009
20. Contributions to the Change in Spreads
21. EMBIG Spreads, 2005-November 2008
22. Spreads and Banking System Characteristics
23. Residuals from the Fixed Effects Regression for Sovereign Spreads, January 2001-October 2008