The Emerging Bright Spot in Europe
IMF Blog, May 18, 2011
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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
- Новое светлое пятно в Европе - Антонио Боржес