- Growth is weakening across the region as export-led recoveries in the Eurozone periphery and emerging economies face weaker foreign demand and tighter credit conditions from ongoing bank deleveraging.
- Weak demand both at home and abroad has helped keep inflation in check despite hikes in indirect taxes and depreciated exchange rates in several countries. Monetary policy has been accommodative in most countries, which should keep interest rates low over the near-term.
- Capital inflows have slowed in many countries as uncertainty has intensified in recent months, as capital requirements have increased and liquidity pressures have continued.
- Weaker domestic demand will contribute to wider current account surpluses and narrower current account deficits.
- Euro depreciation and reduced domestic unit labor costs reversed more than half of the competitiveness losses incurred between euro adoption and 2008-09 peaks of relative unit labor costs for Greece, Ireland, Italy, Portugal and Spain.
Europe Publications
Country Publications
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Hungary: Uncertainty Remains
May 04, 2012Government assurances on central bank independence have led the EU to drop infringement proceedings, easing pressures on the forint and bond yields. Substantial uncertainty remains about the prospects for precautionary financing from the EU and IMF, all the same, leaving market confidence vulnerable. Fiscal tightening, meanwhile, will combined with weak foreign demand and contracting credit from banks to return real GDP to likely contraction this year and perhaps in 2013 as well.
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Greece: Polls Point To Majority ND-PASOK Coalition
May 01, 2012Recent opinion polls suggest some recovery in popular support for ND and PASOK, making a coalition with a narrow majority likely comprised of parties backing the EU-IMF program. Parties opposed to the program could win 60 percent of the vote or more, however, which would make it difficult to claim a clear popular mandate to sustain fiscal adjustment and reform implementation.
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Russia: Ruble Strength Likely to Prove Short-Lived
April 25, 2012Higher oil prices have improved the near-term outlook for growth and the current account, but political uncertainty has limited the upside for the ruble as capital outflows have surged. With these outflows likely to remain large and with the current account surplus narrowing as oil prices ease, depreciation pressures look set to return.
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Turkey: Capital Inflows Recover
April 13, 2012Increases in foreign exchange reserves since January indicate that capital inflows have recovered strongly from depressed levels after August 2011. Whether increased capital inflows are sufficient to cover the current account deficit will depend importantly on whether the central bank sustains the higher money markets interest rates it has brought about since late last year to stem the lira’s slide.
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Euro Briefing: The Anesthetic Wears Off a Little
April 13, 2012Developments since the last Euro Briefing underline that the resolution of the Euro Area crisis will be protracted and painful: Greece is completing a debt exchange that involves large write offs for bondholders, but which was overwhelmingly voluntary in nature; the ECB’s balance sheet has ballooned to more than 30% of GDP; there is renewed concern in the situation in Spain; and there is significant political uncertainty with both Greek and French elections to be held on May 6th.
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Ireland: Recovery Interrupted
April 10, 2012Weaker foreign demand, bank deleveraging and ongoing fiscal retrenchment are likely to constrain output this year. Assuming foreign demand recovers and the Euro Area crisis is contained, growth should return next year and accelerate to more than 3 percent by mid-decade.
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Poland: Resilience Revisited
April 03, 2012Capacity expansion among private firms and ongoing increases in private consumption should keep output growth resilient in 2012 despite softer external demand and accelerated fiscal adjustment. The latter should narrow the fiscal deficit enough to facilitate exit from the EU’s excessive deficit procedure next year.
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Regional Publications
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Euro Area Monetary Developments
April 30, 2012Update on Euro Area monetary developments, March 2012.
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Competitiveness Has Begun To Improve
March 02, 2012Competitiveness losses since 2000 have compounded the adjustment challenges faced by Euro Area periphery countries. Recent improvements, due partly to euro depreciation, have reversed much of the earlier erosions, however. With prospects for the euro uncertain, advancing labor reforms will remain key to achieving and sustaining further competitiveness gains.
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Euro Briefing: Crisis Resolution Enters New Phase
February 22, 2012Efforts to resolve the Euro Area financial crisis entered a new phase on February 21, when Euro Area finance ministers agreed to a second sizeable support package for Greece, a key component of which was a restructuring of Greek government bonds held by private investors. The reduction in value is to be achieved by a debt exchange operation that is unprecedented in its scale and scope. With Europe’s success in creating a credible sovereign backstop remaining uncertain, the ECB has played a critical role in supporting Euro Area financial markets.
This is the second issue of the Euro Briefing, a publication designed to provide a comprehensive, but manageable survey of the Euro Area crisis and its likely evolution.
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Euro Briefing: Crunch Time
January 18, 2012Euro Briefing is a new IIF publication designed to provide our membership with a comprehensive, but manageable survey of the Euro Area crisis and its likely evolution. This Briefing will be maintained on the IIF website and updated periodically, as appropriate. The Euro Briefing is the result of the collective effort of the IIF Economics and Capital Markets departments.
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When Will Markets Discriminate Again?
October 27, 2011Emerging Europe has been affected significantly by a retreat of global risk appetite since the end of July. Financial pressures did not discriminate as countries with stronger fundamentals were affected as well as those with more worrisome imbalances. The region remains vulnerable to a further deterioration in global market sentiment even though markets seem to have already begun to discriminate more among countries.
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Eurozone Quid Pro Quo: Is a Berlin Consensus Emerging?
February 11, 2011A rework soon could reduce interest charges and expand the size and flexibility of Europe’s lending facilities. Tougher conditionality in return would center on reforms to support successful “internal” devaluations. A “Grand Bargain” such as this might still derail, but could, if agreed, begin to ease worries about sovereign debt.
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Recovery Gets Underway
May 12, 2010The outlook has improved, with a recovery under way, inflation and current account deficits largely under control and capital inflows on the rise. The main policy challenge will be to begin to reverse last year's fiscal deterioration and address the root causes of the growing structural deficits.
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