Europe
Regional Economic Outlook: Europe
October 2008
October 2008
The financial crisis has reached extraordinary proportions in recent months. At the same time commodity prices increases have boosted headline inflation, depressing consumption. Growth is expected to stagnate in the near term in most advanced European economies as asset price booms deflate and banks curb credit to reduce leverage. Growth will slow down significantly in the emerging economies in Europe as well. Mutually reinforcing deterioration in financial and economic conditions is the main downside risk to the outlook. Stabilizing financial conditions and nurturing growth are the key policy priorities. In addition to the outlook, the report presents analytical work on the impact of high commodity prices, the turnaround in the credit and asset price cycles, and the macroeconomic effects of cross-border labor flows. |
View the full text (use the free Adobe Acrobat Reader).
| Executive Summary | |
| 1. | Outlook: Dealing with Shocks |
| Advanced Economies | |
| Emerging Economies | |
| 2. | Europe: Coping with High Commodity Prices |
| Commodity Price Boom: Causes and Prospects | |
| Effect of Commodity Price Increases on Inflation in the Advanced Economies | |
| Effect of Commodity Price Increases on Inflation in the Emerging Economies | |
| Policy Responses | |
| Policy Conclusions | |
| 3. | The European Credit Cycle: Diverging Patterns |
| Overview | |
| Vulnerability to Changes in Financial Conditions | |
| Borrowing against Collateral: How Do Financial Cycles Get Amplified? | |
| From Financial Conditions to the Macroeconomy | |
| Cross-Border Lending: Further Benefits and Risks | |
| What Are the Implications for Policy? | |
| 4. | Cross-Border Labor Flows in New Member States: Patterns and Challenges |
| Overview | |
| Patterns | |
| Impact of Labor Mobility on Convergence | |
| References | |
| Boxes | |
| 1. | How Strong Is the Euro? |
| 2. | The Baltics: Harder Times Ahead |
| 3. | Russia: Dealing with Surging Commodity Exports |
| 4. | Pass-Through of Commodity Price Shocks to Inflation in Some Advanced European Economies |
| 5. | Inflation Outlook in the Euro Area |
| 6. | The Effects of Cutting Taxes on Gasoline |
| 7. | Impact of High Oil Prices on Potential Output in Europe |
| 8. | Does the Driver of the Energy Imbalance Matter? |
| 9. | European Securitization and the Possible Revival of Financial Innovation |
| 10. | Institutional Features of Mortgage Markets in Europe |
| 11. | Financial Integration and Growth: Are They Related, and How? |
| 12. | Countercyclical Credit Risk Provisioning: The Spanish Experience |
| 13. | Cross-Border Financial Stability in the European Union: Where Do We Stand? |
| 14. | Migration and Economic Convergence in the New Member States |
| Tables | |
| 1. | European Countries: Real GDP Growth and CPI Inflation, 2006-09 |
| 2. | European Countries: External and Fiscal Balances, Government Debt, 2006-09 |
| 3. | Response of Domestic Food and Energy Inflation to International Commodity Price Inflation Shocks |
| 4. | Response of Core Inflation to Shocks to Domestic Food and Energy Price Inflation |
| 5. | Emerging and Developing Europe: Policy Responses to Inflation Pressures |
| 6. | Selected European Countries: Financial Conditions and Real Activity: Correlations and Variance Decompositions |
| 7. | Increase in Volatility Due to a Rise in the Procyclicality of Lending with and without Financial Cross-Border Spillovers |
| 8. | New Member States: Net Migration Rates, 1992-2007 |
| 9. | Largest Source Countries for Immigration in OECD European Countries, 2000 and 2005 |
| 10. | New Member States: Net Migration Rates by Age Cohorts, 2004-06 |
| Figures | |
| 1. | Key Short-Term Indicators |
| 2. | Europe and the United States: Real GDP Growth, 2001-09 |
| 3. | Estimating Shifts in the Global Price of Risk, 2007-08 |
| 4. | Spreads of Three-Month Interbank Rates over Expected Policy Rates, 2007-08 |
| 5. | Changes in Credit Standards for Loans and Lending to Enterprises, 2005-08 |
| 6. | Growth in Emerging Europe, 2004-09 |
| 7. | Inflation in Emerging Europe, 2004-09 |
| 8. | Emerging Europe: Annual Inflation Excluding Energy, Food, Alcohol, and Tobacco |
| 9. | Sovereign Spreads, July 25, 2007-September 16, 2008 |
| 10. | Emerging Europe EMBI+, January 2007-September 2008 |
| 11. | Metals, Food, and Oil Prices in Real Terms, 1960:Q1-2008:Q2 |
| 12. | Advanced and Emerging Europe: Contribution of Food and Fuel Price Increases to Headline Inflation |
| 13. | Contributors to Price Increases of Major Foods |
| 14. | Headline and Core Inflation, January 2004-August 2008 |
| 15. | Inflation Expectations in the Euro Area and the United Kingdom, 2001-08 |
| 16. | Labor Costs in the Euro Area, 2000:Q4-2008:Q2 |
| 17. | Core Inflation |
| 18. | Inflation Expectations 12 Months Ahead, 2005-08 |
| 19. | Changes in Unit Labor Costs, 2005-07 |
| 20. | Wage Resistance and a Policy Error |
| 21. | Flow of Borrowing in Selected EU Countries: Corporate and Household Sectors, 2002-06 |
| 22. | Corporate and Household Debt in Selected EU Countries, 2002-06 |
| 23. | Average Changes in Asset Prices, 2002-06 |
| 24. | Borrowing against Collateral in the Mortgage Market, 2002-06 |
| 25. | The Financial Accelerator in Economies Characterized by Different Borrowing Limits: Impulse Response Functions to an Adverse Shock to Underlying Productivity |
| 26. | Financial Conditions Indices for the Corporate Sector: Dynamics and Contributions, 2003-08 |
| 27. | Share of Output Variation Explained by Credit and Asset Price Shocks |
| 28. | Cyclicality of Lending and Sensitivity of Credit Growth to Changes in Asset Prices, 2003-08 |
| 29. | Cyclicality of Lending and Macroeconomic Volatility, 2003-08 |
| 30. | Measuring Risk Sharing across European Countries |
| 31. | Measuring Cross-Border Financial Spillovers: Response of Financial Variable to a One-Standard-Error Reduction in U.S. Equity Prices |
| 32. | Stability Gains from Reducing Cyclicality in Lending |
| 33. | Residents from the NMS-8 in the EU-15, 2000-06 |
| 34. | Germany: Seasonal Migratory Workers, 1995-2007 |
| 35. | New Member States: Income per Capita Relative to EU-27, 2000 and 2007 |
| 36. | Simulated Developments in Productivity, Foreign Labor, Consumption, and Output |
| 37. | Simulated Developments in Relative Prices, Current Account, Trade Balance, and Wages |
| 38. | New Member States: Real Wage Developments, 2004-2008:Q1 |
| 39. | New Member States: Job Vacancy Rates, 2005-07 |
| 40. | Foreign Labor Developments with and without Overheating (Simulated) |
| 41. | Impact of Bust on Foreign Labor (Simulated) |
| 42. | New Member States: Employment Rate, 2000-07 |
| 43. | New Member States: Unemployment Rate, 2000-08 |
