Solid Outlook for Europe But Debt, Banking Risks Remain

Overall outlook for Europe is positive

Risks to the recovery include the fragile banking sector and deep-seated problems in Europe's periphery

Further economic integration can improve competitiveness and underpin recovery

But risks include continued weakness in the banking sector as well as deep-seated debt and competitiveness problems in some countries of the European periphery. “We are still concerned with the periphery, with Greece, with Ireland, with Portugal,” Borges said April 15 at a press briefing during the World Bank-IMF Spring Meetings.

“In the case of these three countries, the problem is more structural...In particular, these countries have to solve their own banking problems, which are severe, and we have to solve the competitiveness issue, without which there won’t be economic growth, and long-term debt sustainability cannot be restored.”

Recapitalizing the banking sector

Fixing the financial sector is an important priority that would make Europe more robust and provide more potential for economic growth in the future, Borges said.

While the majority of banks in Europe are strong, a number of banks remain undercapitalized. “It is already being solved in quite a few countries where banks are raising capital, are becoming stronger, but not so vigorously resolved elsewhere in Europe,” Borges said. “There is an element of denial,” he added.

He called for a Europe-wide solution to addressing these problems, including greater openness on the part of national governments to the idea of having strong banks take over weaker banks.

Concerns about sovereign debt

Concerns also remain about the three euro area member countries that have sought financial assistance from the European Union and the IMF: Greece, Ireland, and now also Portugal.

The IMF-supported programs in Greece and Ireland are currently at a critical juncture, Borges said. “There is a great deal of determination to make things happen, but we are at the most difficult point in the cycle in the sense that all the cost of the adjustment is now...