Collective Efforts Needed To Restore Growth in Europe

  • Growth undermined by the euro area sovereign debt crisis
  • Collective efforts, including strong implementation of agreed measures needed to restore confidence
  • Emerging Europe facing a tougher external environment
  • The IMF now projects that growth for all of Europe will slow from 2.3 percent in 2011 to 1.8 percent in 2012, as outlined in the October 2011 Regional Economic Outlook for Europe (see table). The projections are predicated on the assumption that strong action is taken to contain the current crisis, but downside risks remain substantial.

    After a strong start in 2011, a barrage of negative shocks slowed the global economy toward mid-year and exposed underlying economic fragilities. In this context, Europe had to cope with surprisingly soft economic activity in the United States, high commodity prices, and disrupted global supply chains from Japan’s earthquake and tsunami.

    But Europe also contributed to the slowdown with home-grown difficulties from escalating tensions in the euro area’s sovereign debt and financial markets. Sovereign spreads widened sharply in the program countries Greece, Ireland, and Portugal, and tensions spread to Italy and Spain and more broadly through the entire financial system (see chart). While emerging Europe continues to do relatively well, it too could be affected, given its close financial and economic links with the west.

    Waning growth momentum and rising financial tensions call for determined policy action. Most urgently, a consistent, cohesive, and cooperative approach to monetary union needs to be adopted by all euro area stakeholders to secure a durable solution to the euro area crisis.

    “While many important steps have been taken by the European leaders, it is now necessary to deploy quickly the new crisis management tools agreed upon at the July 21 European Summit and come together around a cooperative plan to deal with the various components of the current crisis. This is much needed to restore the confidence of consumers, markets, and investors,” Antonio Borges, Director of the IMF’s European Department, said.

    Reversing the slide in advanced Europe

    Growth in advanced Europe is projected to decline. Developments will continue to be subdued in countries under market pressure, which forces strong austerity and sharp private-sector balance sheet deleveraging.

    Growth in the United Kingdom will remain hampered by weak income prospects before rebalancing in 2012. Countries free from market...

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