The Emerging Bright Spot in Europe

IMF Blog, May 18, 2011

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The Emerging Bright Spot in Europe

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Bibliographic details

• Authors: Antonio Borges
• Published: May 18, 2011

Overview

• Author: Antonio Borges
• Date: May 18, 2011
• Context: Contrasts persistent troubles in Portugal, Greece, and Ireland with a strong comeback in many economies in emerging Europe following the 2008/09 financial crisis.

Recent growth patterns and key statistics

• Lithuania grew "an eye-catching 14.7 percent in the first quarter of 2011."
• Estonia: "exports of goods in the fourth quarter of 2010 were 52 percent higher than a year earlier."
• Current account deficits during the boom years: "25 percent of GDP in Latvia and almost 30 percent of GDP in Bulgaria."
• Recovery breadth: "growth is driven by exports and manufacturing" and is "broadening to include investment and even consumption."
• Outlook for 2011: "domestic demand is set to become the main growth engine in emerging Europe."
• Past crisis timing referenced as the "2008/09 financial crisis."
• Wage dynamics: the "wage explosion of 2007-08 has given way to a decline in labor costs across the region."

Drivers of the turnaround

• Markets at work:
  • Profitability shifted away from real estate, construction, and finance (previously artificially inflated by asset price bubbles and under-pricing of risk) toward other sectors, notably manufacturing and exports.
  • Improvement in competitiveness supported the sectoral reallocation.
• Policies:
  • "Painful but determined fiscal adjustment put public finances back on track," reducing perceived risk.
  • Example: Latvia’s credit default swap spread "is 200 basis points today―down from 1100 basis points in 2009."

Policy recommendations to sustain recovery and raise long-term growth

• Structural policy priorities:
  • "Remove bottlenecks in energy, transportation, and communication" to boost productivity.
  • Use "funding from the European Union" to overcome domestic resource constraints for infrastructure and reforms.
  • "Efforts to upgrade the skills of the labor force" to enable industry to climb the quality ladder.
• Macroeconomic policy guidance to prevent future boom-bust cycles:
  • Apply tighter policies when the next boom takes off to reduce the risk of overheating and resource diversion into low-competition sectors (real estate, banking).
  • When revenues are growing strongly, avoid using them to increase spending and public wages as was done during the boom years.
  • Build up savings during boom years to "stimulate the economy during a downturn," noting that "large, even very large, surpluses may be needed during boom years."

Remaining challenges and outlook

• Recovery rebuilding lost output will take time for many crisis-hit countries.
• Emerging Europe has significant scope to catch up with advanced Europe, but catching-up requires the "right policies"; otherwise countries risk getting "stuck," as illustrated by Greece, Ireland, and Portugal.

Antonio Borges, May 18, 2011

Content in this bundle

• O foco positivo que emerge na Europa Por Antonio Borges
  • O foco positivo que emerge na Europa Por Antonio Borges (Markdown version)
  • O foco positivo que emerge na Europa Por Antonio Borges (PDF)
• Новое светлое пятно в Европе - Антонио Боржес
  • Новое светлое пятно в Европе - Антонио Боржес (Markdown version)
  • Новое светлое пятно в Европе - Антонио Боржес (PDF)