Resilient europe Faces Further Tests

• Author: Camilla Andersen
• Position: IMF External Relations Department
• Pages: 69-76

Page 69

Michael Deppler, head of the IMF's European Department for the past 11 years, speaks in the following interview about the effects of the subprime crisis on Europe and the IMF's first multilateral consultation, a high-level initiative aimed at reducing global economic imbalances.

Deppler, who is retiring after nearly four decades of service, also gives his take on the future of the IMF.

IMF Survey: What impact will the subprime crisis have on Europe's economy?

Deppler: First, you have to be clear about the nature of the problem. In the United States, the housing market was both the spark and the fuel of the crisis. The situation in Europe is different-household saving, loan-to-value ratios, and household balance sheets are generally far stronger there than they are in the United States. This means that the adverse feedback loop between the financial sector and housing in the United States does not have the same force in Europe.

But there is no escaping the fact that we have a global shock to the financial system, and it is bound to affect Europe as well. The slowdown in the United States will pervade the world economy, and the IMF is steadily bringing down its forecasts for Europe. Some people have expressed great pessimism about Europe's prospects. I would not go that far. In my view, Europe will experience a couple of years of slow growth. Unemployment, which until now had been declining steadily, will probably start to rise Page 75 again. That said, I remain reasonably sanguine that Europe's economy will be more resilient than that of the United States.

IMF Survey: How real is the risk of a financial crisis in Europe's emerging markets?

Deppler: In my view, Europe's emerging countries are also resilient. But some of them are susceptible to financial shocks, which could make the situation dramatically worse. While financial markets clearly are backing away from assets they view as too uncertain, there is still an appetite for relatively high-yielding assets for which risks are perceived as less influenced by the crisis in advanced country financial markets. Therefore, lending to emerging Europe remains reasonably buoyant and growth is being sustained, at least for now.

In sum, we do not know yet how big the shock is going to be in emerging Europe. But these countries will not be able to avoid the more general slowdown, and a number of them need to work harder at ensuring the continued confidence of investors.

IMF Survey: As...