{
  "title": "Unwinding Crisis Policies in Europe: Are We There Yet?",
  "publication": "IMF Blog, January 17, 2010",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2010/01/17/unwinding-crisis-policies-in-europe",
  "canonical": "https://www.imf.org/en/blogs/articles/2010/01/17/unwinding-crisis-policies-in-europe",
  "overlayPath": "/en/blogs/articles/2010/01/17/unwinding-crisis-policies-in-europe/index.md",
  "summary": "Context and assessment:",
  "sections": [
    {
      "heading": "Continued macroeconomic support",
      "content": "- Context and assessment:\n  - \"We are no longer at the edge of the abyss that loomed in early 2009, with all but a handful of Europe’s economies now pulling out of recession.\"\n  - Recovery remains fragile, uneven across the continent, and subject to important downside risks.\n  - Extraordinary policy support globally and in Europe \"impairs our ability to read the underlying economic fundamentals.\"\n  - Crisis requires economic restructuring and widespread balance sheet repair—processes that \"necessarily take time.\"\n- Observed ambivalence in indicators:\n  - \"Equity valuations anticipate a solid and durable recovery, yet investors are willing to meet governments’ extraordinary financing needs at very low interest rates as if growth prospects were poor.\"\n  - \"Bank lending... remains tight\" for smaller and medium sized enterprises, while \"capital markets are very active in funding larger corporations.\"\n  - \"Unemployment is still rising but consumers appear to be 'believing in inflation again', which is helping dispel lingering worries over deflation.\"\n  - \"The euro is close to a historic high in real effective terms, and tensions in the euro area from divergences in economic performance and policy implementation have risen.\"\n- Recommendation:\n  - Fiscal and monetary policies should \"continue to support the recovery\" given fragility and downside risks.\n  - IMF plans to publish revised growth forecasts \"at the end of January in the next quarterly update of the World Economic Outlook.\""
    },
    {
      "heading": "Cautious switch from systemic to specific financial intervention",
      "content": "- Appraisal of financial system stability:\n  - \"Confidence and resilience in financial markets has improved and remaining problems appear to be no longer systemic,\" citing ECB Vice-President Lucas Papademos.\n  - Vulnerabilities \"are still high\"—key questions include:\n    - \"Will banks be able to sustain the recent increase in profitability?\"\n    - \"Will they succumb to concentrations in lending to commercial property or emerging markets?\"\n    - \"How would they handle a sharp increase in sovereign yields if fears about fiscal sustainability became widespread?\"\n- Rationale for progressive unwinding:\n  - Concern that supportive policies could become \"an addiction.\"\n  - Most supportive measures have:\n    - \"built in sunset clauses (most enhanced credit support measures),\"\n    - \"provisions linked to market conditions (for instance, debt guarantees),\"\n    - or \"costs that become more onerous as time progresses (for instance, recapitalization schemes).\"\n- Recommended approach:\n  - \"Encourage policymakers to remove financial system supports in line with their built-in expiration dates.\"\n  - Note: \"the ECB has started doing this by ending its one year liquidity support measures and some countries have allowed debt guarantee schemes to lapse.\"\n  - Policy priority should be to \"tackle remaining weaknesses with specific interventions.\""
    },
    {
      "heading": "Next: financial sector reform and credible fiscal consolidation",
      "content": "- Financial sector reform:\n  - Europe has used the crisis \"as an opportunity to put in place new pan-European financial stability arrangements.\"\n  - Europe \"needs to play its part in implementing global regulatory reform.\"\n  - Rapid clarification of \"what the new rules will be\" would allow financial institutions to \"focus on their core business: provide credit where credit is due.\"\n- Fiscal consolidation concerns:\n  - Crisis exposed \"the weak underlying state of public finances in Europe.\"\n  - Worry about \"the surge in government indebtedness and the potential for an adverse shift in sentiment about fiscal sustainability.\"\n  - Countries need to \"demonstrate credible plans for fiscal consolidation.\"\n  - Although Europe's finance ministers \"tabled ambitious intentions, guided by the Stability and Growth Pact,\" translating promises into credible plans \"has become more urgent than is generally perceived.\"\n  - Some issues are \"particularly pertinent for the euro area\" and will be addressed in subsequent analysis.\n\nMarek Belka, January 17, 2010\n\n---\n\n\n References\n\n- emphasized\n- uneven across the continent\n- World Economic Outlook\n- John Lipsky\n- José Viñals\n- Exit Strategy\n- Unwinding Public Interventions in the Financial Sector\n\nSource: https://www.imf.org/en/blogs/articles/2010/01/17/unwinding-crisis-policies-in-europe"
    }
  ],
  "bullets": [
    "[Markdown version](/en/blogs/articles/2010/01/17/unwinding-crisis-policies-in-europe/index.md)",
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    "Authors: Marek Belka",
    "Published: January 17, 2010",
    "Context and assessment:",
    "Observed ambivalence in indicators:",
    "Recommendation:",
    "Appraisal of financial system stability:",
    "Rationale for progressive unwinding:",
    "Recommended approach:",
    "Financial sector reform:",
    "Fiscal consolidation concerns:",
    "[emphasized](http://www.imf.org/external/pubs/ft/survey/so/2010/NEW011410A.htm)",
    "[uneven across the continent](http://www.imf.org/external/pubs/ft/survey/so/2009/CAR122809A.htm)",
    "[World Economic Outlook](http://www.imf.org/external/ns/cs.aspx?id=29)",
    "[John Lipsky](http://blogs.imf.org/2010/01/07/financial-sector-reform/)",
    "[José Viñals](http://blogs.imf.org/bloggers/jose-vinals/)",
    "[Exit Strategy](http://blogs.imf.org/2009/12/02/exit-from-crisis-interventions/)",
    "[Unwinding Public Interventions in the Financial Sector](http://blogs.imf.org/2009/12/10/unwinding-public-interventions-in-the-financial-sector/)"
  ],
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