Crisis Creates Testing Times for Europe's Policymakers

• Author: International Monetary Fund

Tighter financial conditions, falling wealth, and greater uncertainty have triggered a sharp decline in all types of demand. In parallel with the rest of the world, Europe has entered a deep recession, and there is a risk that the recovery will be delayed, especially if policymakers do not address problems in the financial sector head on.

The IMF's most recent forecast for 2009 sees a sharp economic contraction in advanced Europe. In Emerging Europe, output is also projected to fall steeply. Several countries in central and eastern Europe, including Belarus, Hungary, Latvia, and Ukraine, are in deep crisis and have requested financial assistance from the IMF, the European Union, the World Bank, and other partners.

Harsh toll

The June 2009 issue of the IMF's quarterly magazine Finance & Development looks at the harsh toll of the crisis on both Europe's advanced and emerging economies because of the global nature of the shocks that have hit both the financial sector and the real economy, and because of Europe's strong regional and global trade links. The elections for the European Parliament, which ended June 8, highlighted the diverse points of view among the 27 members of the European Union on some of the big challenges facing Europe.

Marek Belka, Director of the IMF's European Department, writes in the lead article that beyond the immediate need for crisis management, Europe must revisit the frameworks on which the European Union is based because many have been found wanting. Most pressing is the need to overhaul the European Union's financial stability framework.

The crisis is also testing the new central and eastern European members of the European Union. But in many respects, one key European institution has proved its mettle-the euro. Both Charles Wyplosz and Barry Eichengreen discuss the future of the common currency.

Key articles include:

Europe Under Stress

Marek Belka

The integration of Europe's economies has been a tremendous success story. This success could...