The
International
Monetary Fund (IMF)
today said that
even though the
global financial
crisis will
cause a sharp
deceleration of
economic
activity, the
comprehensive
crisis
management
actions being
undertaken
should allow
Europe to avoid
a worse outcome.
In its
October 2008
Regional
Economic Outlook
for Europe (REO),
the IMF projects
activity in
advanced
European
economies to
stagnate in the
near-term with
growth expected
at 1.3% in 2008
and 0.2% in
2009. While
these
projections were
finalized before
the crisis
reached systemic
proportions in
early October,
they remain
broadly valid,
even though some
of the downside
risks have
materialized.
1
In particular,
emerging
European
economies are
now likely to
grow at a
somewhat slower
pace than the
4.3% in 2009
anticipated in
the report.
The IMF's
baseline
scenario for
Europe's
economic outlook
relies on
successful
containment of
the financial
crisis. "Times
are no doubt
extraordinarily
uncertain, but
we are now
seeing the
concerted
response that
demonstrates
policymakers'
awareness that
the global
crisis needs a
global response.
For Europe, this
crisis provides
a catalyst for
improved
cross-border
coordination,
and we encourage
European leaders
to follow up
with bold steps
on their recent
commitment to
concerted and
coordinated
action, to
resolve this
crisis swiftly,"
said Alessandro
Leipold, Acting
Director of the
IMF's European
Department.
Policies will
also need to
nurture the
economic
recovery. The
IMF projects
inflation to
drop to levels
below central
bank objectives
in most of
Europe's
advanced
economies in
2009. "With
upside risks to
inflation
rapidly
dissipating, the
recent concerted
easing of
monetary policy
was appropriate
and there is
scope for
further easing
going forward.
Meanwhile, the
provisions of
the Stability
and Growth
Pact-which
incorporate
greater
flexibility than
is often
thought-will
allow fiscal
policy to
cushion the
downturn," said
Leipold.
For their
part, Europe's
emerging markets
are also feeling
the strain. They
will need to
respond quickly
to any shortfall
in capital flows
that may arise,
including by
using reserves
and strong
fiscal positions
when such
buffers exist.
Contingency
plans should be
drawn up to deal
with hard
landings or to
mitigate the
adverse effects
from the crisis
on banks and
firms. And,
Leipold noted, "The
Fund of course
stands ready to
help as needed."
Analytic
Chapters in the
October 2008 REO
Chapter 2
of the October
2008 REO,
entitled
"Europe: Coping
with High
Commodity Prices,"
concludes that
advanced
economies in
Europe are
better
positioned than
emerging
economies to
head off
second-round
effects on
inflation from
the surge in
commodity prices,
seen earlier
this year.
Improved labor
market
flexibility,
strong monetary
policy
credibility and
the weak outlook
for activity in
advanced
countries should
limit the
pass-through of
commodity price
shocks to core
inflation.
Appropriate
policy responses
to commodity
price increases
depend on the
source of the
price pressures,
the credibility
of policymakers,
and the degree
of labor market
flexibility.
Chapter 3,
entitled "The
European Credit
Cycle: Diverging
Patterns," looks
at financial
system cycles
and their impact
on real activity
across Europe.
The financial
sector can
amplify business
cycle
fluctuations, as
well as the
impact of
monetary policy
shocks and asset
price movements
on real activity.
Cross-border
ownership of
assets further
bolsters this
mechanism. The
chapter finds
that emerging
economies are
likely to be
more vulnerable
than advanced
economies to the
current downturn
in the credit
cycle, though
with large
differences
among countries.
The introduction
of a
countercyclical
element in
prudential
regulation could
substantially
reduce the
volatility of
investment,
particularly in
financially
integrated
economies.
Financial
integration,
therefore,
remains
essential to
foster smooth
adjustments
within Europe.
Chapter 4,
entitled "Cross-Border
Labor Flows in
New Member
States: Patterns
and Challenges,"
concludes that
the flow of
labor across
EU's New Member
States has been
a key feature in
their
convergence
process. Labor
mobility has
significant
advantages: it
speeds up
convergence,
boosts
economy-wide
capital-labor
ratios, supports
aggregate demand
through
remittances, and
may help augment
skills through
the
reintegration of
returning
migrants in
domestic labor
markets.
Restricting
labor mobility
would not be the
answer to
overheating
pressures;
policies to
improve overall
labor
mobilization are
a better avenue.
