Europe: Engine for Global Trade, but Should Prepare for Rainy Day

IMF News, November 13, 2017

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Overall real GDP growth for Europe is projected at 2.4 percent in 2017, faster than was expected in April 2017, and up from 1.7 percent in 2016.
Europe’s contribution to the growth of global merchandise imports in 2016–17 is similar to that of China and the United States combined.
Growth has been broad-based and primarily driven by domestic demand, including a pickup in investment.
In the euro area, growth has not been this even across the member countries for nearly two decades.

Euro area: unusually even growth across member countries; some member countries receiving EU funds experienced faster growth due to an uptick in the flow of funds.
United Kingdom: growth slowed when households felt the squeeze of a weaker pound.
Russia: improved consumer confidence, higher oil prices and cheaper financing will continue to support growth.
Turkey: economy gained momentum from budget support in 2017.
Central and southeastern Europe: wages have grown strongly in the past several years, especially in the services sector; productivity growth has not kept up with wage growth over the last two years, posing competitiveness risks for emerging Europe.

Unemployment has decreased throughout the continent as a result of the broad-based growth.
Wages have grown slowly in many richer countries, but strongly in central and southeastern Europe in recent years.

Many European countries still have only a thin cushion accumulated for a rainy day.
Persistent issues include weak productivity growth and bad loans inherited from the financial crisis of 2008.
Structural and external risks: aging population, spreading protectionism, geopolitical tensions, and export loss because of a downturn in China.
The currency union of the European Union (the 19-member euro area) must be more solid to avoid a domino effect in case of difficulties in one of its members.

General: Take advantage of the current economic upswing so economies can adjust and build buffers.
Advanced European economies with high public debt (Belgium, France, Italy, Portugal, Spain, and the United Kingdom) should lower their debt, but without jeopardizing the economic uptick.
Countries with fiscal space (Germany, the Netherlands and Sweden) should lift their potential growth through greater public investment in infrastructure, the integration of immigrants, and housing.
Emerging market economies (including Hungary, Poland, and Romania, and several countries in the western Balkans and in the Commonwealth of Independent States) should improve the quality of their public expenditure and modify the composition of their revenue in a way that keeps the regions’ competitiveness intact.
Euro area institutional agenda:
- Complete the banking union and capital markets union, including by establishing a deposit insurance system to safeguard savings in case of a banking crisis.
- Build a set of common budgetary tools that could increase the resilience of the euro area.
- Resolve banking sector problems remaining from the financial crisis.
- Adhere strictly to the common fiscal rules defining the maximum budget deficit.

Convergence of emerging Europe with richer nations has slowed since the crisis.
A new generation of reforms aimed at strengthening institutions is needed to reignite convergence.
The legal framework and the quality of the judiciary are highlighted as critical elements of the business environment.

IMF Country Focus — Europe: Engine for Global Trade, but Should Prepare for Rainy Day (November 13, 2017).

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