## Unwinding Crisis Policies in Europe: Are We There Yet?

_IMF Blog, January 17, 2010_

## Source details

**Canonical URL:** [Unwinding Crisis Policies in Europe: Are We There Yet?](https://www.imf.org/en/blogs/articles/2010/01/17/unwinding-crisis-policies-in-europe)

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## Bibliographic details
- Authors: Marek Belka
- Published: January 17, 2010

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### Continued macroeconomic support
- Context and assessment:
  - "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."
  - Recovery remains fragile, uneven across the continent, and subject to important downside risks.
  - Extraordinary policy support globally and in Europe "impairs our ability to read the underlying economic fundamentals."
  - Crisis requires economic restructuring and widespread balance sheet repair—processes that "necessarily take time."
- Observed ambivalence in indicators:
  - "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."
  - "Bank lending... remains tight" for smaller and medium sized enterprises, while "capital markets are very active in funding larger corporations."
  - "Unemployment is still rising but consumers appear to be 'believing in inflation again', which is helping dispel lingering worries over deflation."
  - "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."
- Recommendation:
  - Fiscal and monetary policies should "continue to support the recovery" given fragility and downside risks.
  - IMF plans to publish revised growth forecasts "at the end of January in the next quarterly update of the World Economic Outlook."

### Cautious switch from systemic to specific financial intervention
- Appraisal of financial system stability:
  - "Confidence and resilience in financial markets has improved and remaining problems appear to be no longer systemic," citing ECB Vice-President Lucas Papademos.
  - Vulnerabilities "are still high"—key questions include:
    - "Will banks be able to sustain the recent increase in profitability?"
    - "Will they succumb to concentrations in lending to commercial property or emerging markets?"
    - "How would they handle a sharp increase in sovereign yields if fears about fiscal sustainability became widespread?"
- Rationale for progressive unwinding:
  - Concern that supportive policies could become "an addiction."
  - Most supportive measures have:
    - "built in sunset clauses (most enhanced credit support measures),"
    - "provisions linked to market conditions (for instance, debt guarantees),"
    - or "costs that become more onerous as time progresses (for instance, recapitalization schemes)."
- Recommended approach:
  - "Encourage policymakers to remove financial system supports in line with their built-in expiration dates."
  - 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."
  - Policy priority should be to "tackle remaining weaknesses with specific interventions."

### Next: financial sector reform and credible fiscal consolidation
- Financial sector reform:
  - Europe has used the crisis "as an opportunity to put in place new pan-European financial stability arrangements."
  - Europe "needs to play its part in implementing global regulatory reform."
  - 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."
- Fiscal consolidation concerns:
  - Crisis exposed "the weak underlying state of public finances in Europe."
  - Worry about "the surge in government indebtedness and the potential for an adverse shift in sentiment about fiscal sustainability."
  - Countries need to "demonstrate credible plans for fiscal consolidation."
  - 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."
  - Some issues are "particularly pertinent for the euro area" and will be addressed in subsequent analysis.

*Marek Belka, January 17, 2010*

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## References

- [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/)

_Source: https://www.imf.org/en/blogs/articles/2010/01/17/unwinding-crisis-policies-in-europe_