IMF Urges Government Action to Secure Recovery of European Emerging Markets

“In emerging Europe, resuming convergence will depend on restoring sustainable capital inflows by ensuring a business-friendly environment, strengthening policy frameworks to reduce uncertainty, and implementing sound macroeconomic policies,” the IMF said in its October 2009 Regional Economic Outlook (REO) for Europe posted on its website.

The recession shows signs of bottoming out but the recovery will likely be slow and fragile as Europe cannot count on exports alone to drive the recovery, the Director of the IMF’s European Department, Marek Belka, said in the report.

“The economic recovery might be weaker than hoped for unless the financial sector problems are dealt with promptly and effectively,” Belka said.

With signs that the recession is nearly over, European policymakers now need to focus on securing a durable recovery and addressing the threats to potential growth from the financial crisis and the continent’s traditional structural rigidities.

Emerging Europe is likely to face higher risk premiums and a more volatile environment in the aftermath of the financial crisis. While the global crisis might be receding, investors are paying increased attention to domestic factors and policies, creating significant cross-country differences in sovereign spreads, the IMF said.

Higher and more volatile spreads increase the variability of inflation and output over the cycle, with further deleterious effects on investment, growth, and prospects for convergence. Restoring the normal functioning of the financial system where needed, and strengthening financial stability and fiscal sustainability frameworks will go a long way toward addressing these concerns. Such policies could yield a “double dividend” by lowering the volatility of the business cycle and improving prospects for long-term growth.

In the near term, further action to restore normal functioning of the financial system remains crucial, while policymakers will need to move carefully to sustain the upswing and to prepare for exit from the extraordinary interventions in a coordinated fashion, the IMF said.

"And many emerging economies will need to adapt to lower capital inflows, address debt overhangs, and institute structural change," it added.