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IMFSurvey Magazine: Countries & Regions

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Solid Outlook for Europe But Debt, Banking Risks Remain

Fruit stand in Dublin, Ireland. The overall outlook for Europe is positive, but there are still significant risks to the recovery (photo: Newscom)

EUROPEAN BRIEFING

Solid Outlook for Europe But Debt, Banking Risks Remain

IMF Survey online

April 17, 2011

  • Overall outlook for Europe is positive
  • Risks to the recovery include the fragile banking sector and deep-seated problems in Europe's periphery
  • Further economic integration can improve competitiveness and underpin recovery

The overall outlook for Europe is positive but there are still significant risks to the recovery, according to Antonio Borges, Director of the IMF’s European Department. “Many European countries are doing very well, in particular in Eastern Europe where there is surprisingly strong growth… There is good growth in Northern Europe as well. So overall, we think Europe is on the right track,” he said.

But risks include continued weakness in the banking sector as well as deep-seated debt and competitiveness problems in some countries of the European periphery. “We are still concerned with the periphery, with Greece, with Ireland, with Portugal,” Borges said April 15 at a press briefing during the World Bank-IMF Spring Meetings.

“In the case of these three countries, the problem is more structural...In particular, these countries have to solve their own banking problems, which are severe, and we have to solve the competitiveness issue, without which there won’t be economic growth, and long-term debt sustainability cannot be restored.”

Recapitalizing the banking sector

Fixing the financial sector is an important priority that would make Europe more robust and provide more potential for economic growth in the future, Borges said.

While the majority of banks in Europe are strong, a number of banks remain undercapitalized. “It is already being solved in quite a few countries where banks are raising capital, are becoming stronger, but not so vigorously resolved elsewhere in Europe,” Borges said. “There is an element of denial,” he added.

He called for a Europe-wide solution to addressing these problems, including greater openness on the part of national governments to the idea of having strong banks take over weaker banks.

Concerns about sovereign debt

Concerns also remain about the three euro area member countries that have sought financial assistance from the European Union and the IMF: Greece, Ireland, and now also Portugal.

The IMF-supported programs in Greece and Ireland are currently at a critical juncture, Borges said. “There is a great deal of determination to make things happen, but we are at the most difficult point in the cycle in the sense that all the cost of the adjustment is now being borne by these economies and we have to wait a few more months before they go back to economic growth and begin to see the light at the end of the tunnel. So this is not the moment to give up or lose determination.”

Echoing remarks by IMF Managing Director Dominique Strauss Kahn, Borges firmly ruled out debt restructuring as an option for Greece. “The program establishes that Greece will go back to the markets and will be able to confirm debt sustainability, and the program is on track.” But he added that it was now generally recognized that this process may take a little longer than originally anticipated under the program.

Borges also noted that the sovereign debt crisis has now largely been contained to the three smaller EU member countries because of the progress made by Spain in the past year in addressing its public finances and problems in its banking sector. “Spain was in a similar situation as the others a year ago. Today, it’s in a different world and the markets recognize this very well,” he said.

Further integration boon to growth

As countries work to restore competitiveness―a precondition for a return to growth and jobs―they should seek to take advantage of the whole of Europe to reorganize their supply chains. “Europe still has a lot to gain from further economic integration,” Borges said.

He welcomed recent institutional progress towards Europe-wide regulatory agencies as a means to facilitate crisis prevention and resolution in the European Union.


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