Europe
Regional Economic Outlook: Navigating Stormy Waters: Europe
October 2011
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October 2011
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October 2011
©2011 International Monetary Fund
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Following a strong showing in early 2011, the economies across Europe now face the prospect of a pronounced slowdown, as global growth has softened, risk aversion has risen, and strains in Europe’s sovereign debt and financial markets have deepened, according to the Regional Economic Outlook: Europe. Downside risks are significant, and a further deepening of the euro area crisis would affect not only advanced Europe, but also emerging Europe, given its tight economic and financial ties. The policy stance in advanced Europe will need to be adapted to reflect the weakening and tense outlook, financial systems strengthened further, and a consistent, cohesive, and cooperative approach to monetary union adopted by all euro area stakeholders. The cross-country experience in the past decade in Europe shows the difference that good policies can make in boosting growth, with some European countries having grown rapidly while others have stagnated. Escaping low-growth traps, through broad-based reforms that address macroeconomic imbalances and country-specific structural rigidities, is possible.
| Contents | |||
| Introduction and Overview | |||
| 1. Advanced Europe: Reversing the Slide | |||
| Divergent Recoveries, but a Synchronized Slowdown? | |||
| New Headwinds from an Escalating Euro Area Sovereign Crisis | |||
| Policies to Stop the Slide | |||
| 2. Emerging Europe: Reducing Vulnerabilities to Prevent Financial Turmoil |
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| Developments in the First Half of 2011 | |||
| Outlook for the Remainder of 2011 and 2012 | |||
| Risks to the Outlook | |||
| Key Policy Issues | |||
| Toward Sustainable Convergence with Advanced Europe | |||
| 3. Long-Term Growth Differentials within Europe | |||
| Growth Differentials in Europe | |||
| Low Growth Traps and How to Get Out of Them | |||
| Extending the European Growth Frontier | |||
| 4. East-West Economic and Financial Linkages in Europe | |||
| Stylized Facts | |||
| Spillovers and Quantifications | |||
| Policy Implications | |||
| Annex | |||
| Appendix. Europe: IMF-Supported Arrangements | |||
| References | |||
| Boxes | |||
| 1.1. | Labor Reforms in the Euro Area: Still Too Little? | ||
| 1.2. | Monetary Policy and Bank Performance in Advanced Europe | ||
| 1.3. | Macro-prudential Reforms in the EU: Objectives and Progress | ||
| 2.1. | The Appeal of Fiscal Expenditure Rules in Countries of CESEE | ||
| 2.2. | Institutions That Facilitate Fiscal Consolidation | ||
| 2.3. | Nonperforming Loans (NPLs) and Credit Growth in Emerging Europe | ||
| 3.1. | Stylized Facts from the Economic Growth Literature | ||
| 3.2. | Labor Market Reform: The Experience of the Netherlands in the 1980s–1990s | ||
| 3.3. | Sweden: Structural Reforms in the 1990s | ||
| 3.4. | Why Has Italy Grown So Poorly in the Last 20 Years? | ||
| 3.5. | United Kingdom: Structural Reforms during the 1980s | ||
| 3.6. | EU State Aid Policy and Industrial Policy | ||
| 3.7. | Promoting Research and Innovation: Sweden’s Research and Innovation Bill (2008) | ||
| Tables | |||
| 1. | European Countries: Real GDP Growth and CPI Inflation, 2009–12 | ||
| 1.1. | Advanced European Countries: Main Macroeconomic Indicators, 2009–12 | ||
| 2.1. | Emerging Europe: Growth of Real GDP, Domestic Demand, Exports, and Private Consumption, 2009–12 | ||
| 2.2. | Emerging Europe: CPI Inflation, Current Account Balance, and External Debt, 2009–12 | ||
| 2.3. | Emerging Europe: Evolution of Public Debt and General Government Balance, 2009–12 | ||
| 2.4. | Emerging Europe: Selected Financial Soundness Indicators, 2007–11 | ||
| 3.1. | United States and EU15: Comparison of GDP Per Capita and Its Decomposition (2010) | ||
| 4.1. | Europe: Degree of Trade Interconnectedness | ||
| 4.2. | CESEE and Western Europe: Bilateral Trade, 2010 | ||
| 4.3. | CESEE and Western Europe: Bilateral Trade, 2010 | ||
| 4.4. | Selected Countries: Measures of Vertical Specialization across Borders, 2004 | ||
| Figures | |||
| 1.1. | Selected Advanced European Countries: Sectoral Debt Levels, 2010 | ||
| 1.2. | Selected Advanced European Countries: Export Market Share, 2000 and 2010 | ||
| 1.3. | Selected Advanced European Countries: Real GDP, 2007:Q1–2011:Q2 | ||
| 1.4. | Euro Area: Contributions to GDP Growth, 2006:Q1–2011:Q2 | ||
| 1.5. | Euro Area Countries and United Kingdom: External Imbalances, 2009–11 | ||
| 1.6. | Selected European Countries: Drivers of Public Debt Increase, 2007–11 | ||
| 1.7. | Euro Area and Selected Countries: Monetary Policy Stance, 2009–11 | ||
| 1.8. | Euro Area and United Kingdom: Headline and Core Inflation, January 2006–July 2011 | ||
| 1.9. | Selected European Countries: Tangible Common Equity and Wholesale Funding Ratio, 2007–10 | ||
| 1.10. | Selected European Countries: Financial Sector Assets Relative to Size of Economy, 2010 | ||
| 1.11. | Selected European Countries and the United States: Unemployment Rate, January 2006–July 2011 | ||
| 1.12. | Euro Area: Mergers and Acquisitions by Nationality of Buyer, 2005–11 | ||
| 1.13. | Euro Area: Banking Sector Risk Index, 2007–11 | ||
| 1.14. | Selected European Countries: Key Short-Term Indicators, 2006–11 | ||
| 1.15. | Selected European Countries: Decomposition of 10-Year Government Bond Spreads vis-à-vis OIS Rate, 2009:Q3–2011:Q2 | ||
| 1.16. | Selected Advanced Countries: Claims on Domestic Banks and Public Sector, 2009:Q4 and 2011:Q1 | ||
| 1.17. | Selected Advanced European Countries: Changes in General Government Fiscal Deficits, 2010–13 | ||
| 2.1. | Emerging Europe: Contributions to GDP Growth | ||
| 2.2. | Global Markets: Commodity Prices, January 2006–August 2011 | ||
| 2.3. | Emerging Europe: Real Private Sector Credit Growth, 2007–08 versus Latest | ||
| 2.4. | Emerging Europe: Real GDP | ||
| 2.5. | Emerging Europe: Inflation, January 2008–July 2011 | ||
| 2.6. | Emerging Europe: Industrial Production, January 2008–July 2011 | ||
| 2.7. | Emerging Europe: Consumer Confidence, January 2007–August 2011 | ||
| 2.8. | Emerging Europe: Contributions to GDP Growth, 2011–12 | ||
| 2.9. | CESEE and EA3 Countries: Funding Costs, January 1, 2007–September 6, 2011 | ||
| 2.10. | Selected European Countries: 5-Year CDS Spreads, January 1, 2008–September 6, 2011 | ||
| 2.11. | Emerging Europe: Change in Overall Fiscal Balances and General Government Gross Debt, 2010–12 | ||
| 2.12. | Emerging Europe: Fiscal Vulnerability Indicators in Perspective | ||
| 2.13. | Selected Countries: Bank Nonperforming Loans to Total Loans | ||
| 2.14. | Emerging Europe: NPL Levels and Past Credit Growth | ||
| 2.15. | Emerging Europe: Bank Nonperforming Loans to Total Loans, 2006–11 | ||
| 2.16. | Emerging Europe: Bank Provisions to Nonperforming Loans, 2010–11 | ||
| 2.17. | Selected Banks in Emerging Europe: European Bank Stress Tests | ||
| 3.1. | European Countries: Change in Real GDP Per Capita, 2000–10 | ||
| 3.2. | Convergence in the Three Global Regions, 2000–10 | ||
| 3.3. | European Countries: Contribution to GDP Growth of Investment and Capital Flows, 2000–10 | ||
| 3.4. | European Countries: Change in TFP Relative to Per Capita GDP, 2000–09 | ||
| 3.5. | Europe: Contribution to Growth of Output Per Hour Worked | ||
| 3.6. | Europe: Contribution to Growth of Employment, 2000–08 | ||
| 3.7. | Europe: Growth Experience Beyond What Is Explained by Convergence | ||
| 3.8. | Selected European Economies: Domestic Demand Booms and Their Impact on Long-Term Growth, 2000–10 | ||
| 3.9. | Europe: Public Debt and Adjusted Growth | ||
| 3.10. | Europe: Corporate Tax Rates and Growth, 2000–10 | ||
| 3.11. | Europe: Labor Market Flexibility, Employment, and Labor Participation, 2010 | ||
| 3.12. | Europe: Education Levels and Growth, 2000–10 | ||
| 3.13. | Emerging Europe: Economic Transition and Growth, 2000–10 | ||
| 3.14. | Advanced Europe: Product Markets Efficiency and Growth, 2000–10 | ||
| 3.15. | Advanced Europe: Institutional Quality, Legal Structure, and Growth, 2000–10 | ||
| 3.16. | Advanced Europe: Innovation, Technological Readiness, and Growth, 2000–10 | ||
| 3.17. | Selected EU Countries: Trade Openness, 1995–2010 | ||
| 3.18. | Europe: Trade Openness and Growth, 2000–10 | ||
| 3.19. | Europe: The Size of Tradable and Nontradable Sectors Relative to Productivity and Growth, 2000–10 | ||
| 3.20. | Advanced Europe: Market and Institutional Efficiency Relative to Export Growth, 2000–10 | ||
| 3.21. | Netherlands and Sweden: GDP per Capita Relative to Germany, 1970–2010 | ||
| 3.22. | Netherlands and Sweden: Government Primary Spending, 1970–2010 | ||
| 3.23. | Netherlands and Sweden: Real Compensation Rate of the Private Sector, 1970–2010 | ||
| 3.24. | Netherlands and Sweden: Employment Rate, 1970–2010 | ||
| 3.25. | Netherlands and Sweden: Labor Productivity per Worker, 1970–2010 | ||
| 3.26. | Netherlands and Sweden: Exports of Goods and Services, 1970–2010 | ||
| 3.27. | Hungary and Its Peers: Government Spending, 2009 | ||
| 3.28. | United States and Selected EU Countries: Per Capita GDP, 2000 and 2010 | ||
| 3.29. | United States and Selected EU Countries: Contribution to TFP Growth of Major Sectors, 1995–2007 | ||
| 3.30. | EU13 and United States: Human Capital Stock Comparisons, 2005 Level | ||
| 3.31. | United States and Selected EU Economies: Services Sector Contribution to TFP Growth (1995–2007) and Regulatory Conditions | ||
| 3.32. | United States, Japan, and Selected European Countries: Innovation Indicators, 2009–10 Weighted Average | ||
| 4.1. | Selected Global Regions: Total Trade Flows, 2010 | ||
| 4.2. | Europe and Rest of the World: Trade Flows of Goods, 2010 | ||
| 4.3. | CESEE: GDP Relative to Western Europe, 1995–2015 | ||
| 4.4. | CESEE and Western Europe: Import and Export Shares by Region, 1995–2010 | ||
| 4.5. | Selected Global Regions: Intraregional Trade of Intermediate Goods, 1996–2009 | ||
| 4.6. | CESEE and Western Europe: Trade of Intermediate Goods in Europe, 1996–2009 | ||
| 4.7. | Selected European Regions: Importsand Exports between CESEE and Western Europe by Components, 2009 | ||
| 4.8. | CESEE: Inward Foreign Direct Investment Stock by Origins of Funds and Sectors,2008 | ||
| 4.9. | Europe: Accumulated German Foreign Direct Investment, 2007–10 | ||
| 4.10. | CESEE: Funding from BIS-Reporting Banks, 2010 | ||
| 4.11. | CESEE: Consolidated Claims of BIS-Reporting Banks by Country of Bank Ownership, 2010 | ||
| 4.12. | Western Europe: Consolidated Claims of BIS-Reporting Banks on CESEE by Country of Bank Ownership, 2010 | ||
| 4.13. | CESEE: Funding from Western Banks and Imports from Western Europe, 2003–08 | ||
| 4.14. | Asia and Europe: Impact of Output Spillovers through the Trade Channel | ||
| 4.15. | Europe: Growth Spillovers between CESEE and Western Europe | ||
| 4.16. | Europe: Credit Spillovers from Western Europe to CESEE | ||
