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Difficult Choices Ahead for Europe's Policymakers

A student in Bucharest: Strauss-Kahn will visit the city where he will debate the issues of the day with students (photo: Daniel Mihailescu/AFP).

THE ROAD AHEAD FOR EUROPE

Difficult Choices Ahead for Europe's Policymakers

IMF Survey online

March 26, 2010

  • IMF chief visits Poland and Romania
  • Strauss-Kahn to reflect on road ahead for Europe
  • Challenges include overhaul of financial architecture

Just as the world economy is emerging from crisis, the European Union is faced with a host of new challenges, including how to address the serious fiscal problems in some euro area countries, most notably Greece.

IMF Managing Director Dominique Strauss-Kahn has called on Europe’s policymakers to work more closely on issues ranging from fiscal policy to financial sector regulation to make Europe’s institutions stronger, more resilient to crisis, and better able to promote growth and prosperity.

He is likely to repeat his call for closer cooperation and further reforms to Europe’s architecture when he travels to Poland and Romania on March 29-31.

During his visit, Strauss-Kahn will speak to students of the Warsaw School of Economics about the transformation their region has undergone since the fall of the Berlin Wall 20 years ago. He will also participate in a TV panel debate, which will be broadcast live from the Royal Castle. The debate, titled “Twenty years of Transformation in Central and Eastern Europe: Fulfilling the European Promise,” will also feature former Latvian President Vaira Vike-Freiberga, editor-in-chief of Gazeta Wyborcza Adam Michnik, and Jacques Rupnik, a historian.

Following his visit to Poland, Strauss-Kahn will travel to Bucharest on March 30, where he will address the Romanian Parliament and engage in a debate with students at the Academy of Economic Studies.

New growth model in emerging Europe

Central and eastern Europe was hard hit by the global financial crisis because of the region’s close trade links and reliance on capital flows. Today, the region is in recovery, with the IMF predicting growth in the order of 2 percent of GDP for central and eastern Europe this year.

But even though most countries in central and eastern Europe will see positive GDP growth this year, a return to the high growth rates that preceded the crisis is unlikely. Exports are now recovering, but domestic demand is projected to stay weak.

In order to reignite growth, countries in emerging Europe will need to rethink their growth models. Many countries should reduce their dependence on banking, construction, and real estate―sectors that boomed before the crisis―focusing instead on increasing their presence in world markets.

Controlling debt a key goal

For many countries in Western Europe, the most critical task is to bring public debt back to sustainable levels in order to alleviate serious concerns about economic stability. This will not be an easy task. IMF research shows that public debt is set to rise to an average 110 percent of GDP by 2014 in advanced economies, about 35 percentage points higher than before the crisis.

The challenge will be to consolidate fiscal policy without undermining the recovery, which remains fragile in many euro area economies. The IMF is forecasting growth of 1 percent this year for the euro area as a whole.

In Western Europe also, there may be a need to recalibrate growth models. In economies that have been running persistent current account deficits, domestic saving will have to increase, with exports contributing more to growth. In economies with persistent current account surpluses, domestic demand may need a boost.

Reforms to Europe’s financial architecture

While each country must devise its own policy mix for rekindling growth and creating jobs, there are also challenges that must be tackled at the regional level.

For instance, the European Union has yet to finalize its planned overhaul of financial sector regulation. While policymakers have made progress on financial sector regulation and supervision, more work is needed in the area of crisis management and resolution. In a recent speech, Strauss-Kahn called for the establishment of a European Resolution Authority, armed with the tools to deal cost-effectively with failing cross-border banks.

Meetings with policymakers

During his visit to Poland, Strauss-Kahn will meet with Prime Minister Donald Tusk, Finance Minister Jacek Rostowski, and National Bank President Slawomir Skrzypek to discuss Poland’s economy and global and regional economic developments.

In Bucharest, Strauss-Kahn will meet with President Traian Băsescu, Prime Minister Emil Boc, Minister of Public Finance Sebastian Vladescu, and Central Bank Governor Mugur Isarescu to discuss the government’s economic program, which is supported by an IMF program.


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