IMF: European Recession Could Worsen

• Recovery may start in 2010

V. Ribana

Europe has fallen into a deep recession and there is a risk that it may worsen because of collapsing confidence in the region and the global demand decline, the International Monetary Fund (IMF) estimates. In their opinion, "The financial crisis is taking a harsh toll 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 IMF believe the severe recession of European economies could end in the second half of 2010 and be followed by gradual recovery. However, recovery depends on further action, especially in the financial sector, and political coordination across Europe to ensure an efficient response to the crisis.

For the advanced economies in Europe, the IMF are projecting a 4% decline in 2009 improving to a 0.4% decline in 2010. For emerging Europe, the IMF are expecting a decline of 4.9% in 2009 and a 0.7% growth in 2010. "The measures taken to counteract the deep recession in Europe have provided a good foundation for a gradual recovery, but further actions by policy makers, particularly in the financial sector, are needed to restore market trust, and accelerate the recovery," said Marek Belka, director of the IMF"s European Department.

In IMF"s view the measures include continued provision of liquidity and engagement in credit easing where necessary, credible loss recognition in the financial system and recapitalization of viable institutions by the private sector with public support, if necessary.

Macroeconomic policies should continue to be a cornerstone in the effort to mitigate the impact of the recession. Fiscal policy should support demand combining a rapid and extensive implementation of the stimulus packages with a commitment to future fiscal consolidation, the IMF further wrote. Additionally, monetary policy should be employed to anchor inflationary projections into healthy foundations and prevent the risk associated to deflation.

Regarding emerging Europe, IMF believes that the financial sector is a key factor determining the speed of the recovery from the economic crisis. In IMF"s opinion, if the banks affected by the crisis respond by drastic cuts on lending, such measure will have a negative impact on the economy - especially on consumption and investment - considerably slowing down the recovery process. The IMF also believes that, particularly for emerging Europe, cross-border banks need full coordination between the host country and the country where the bank is headquartered on the principles for loss recognition. Agreement is specifically needed on burden sharing in recapitalization between home and host countries.