It’s the IMF’s imagery. Behind it, though, are real concerns about persistent core inflation in Central, Eastern, and Southeastern Europe. And then there are teh structural issues.
The International Monetary Fund (IMF) recommends spending this weekend contemplating Europe’s potential soft landing after “Russia’s invasion of Ukraine, a large energy shock, and the emergence of a more divided global economy”. At the European Central Bank House of the Euro in Brussels on May 14th, IMF experts examined the EU’s handling of the shocks to its systems, and what needs to be done to ensure lasting growth.
Some of the concerns and conclusions have been in the press for days now. European productivity lags that of the U.S., though the analyst’s comment that ‘unlike the U.S., Europe cannot depopulate whole areas for concentration effects’ is generally overlooked. The need for banking system reform was picked up by French president Emmanuel Macron, who recommended making Paris the new capital of capital.
Lift and drag
However, the risk of the EU and its member states not being able to tamp down macroeconomic disbalances in Central, Eastern, and Southeastern Europe (CESEE) is a something looked at, but which has gone underreported. The IMF points to “still-high wage growth, stickier core inflation, and persistently high inflation expectations” in this region.
These are only the more immediate problems. Underneath them are structural issues that need to be addressed.
“The CESEE region, where private investment was already low before the pandemic and Russia’s invasion of Ukraine, has seen relative wage levels rising, pressuring compet itiveness. Across the continent, geoeconomic fragmentation is casting a shadow on old growth models. At the same time, rising long-term expenditure pressures due to aging populations, climate ambitions, and ramped-up defense spending call for structural fiscal reforms and add to the urgency of raising growth sustainably.”
In contrast to “advanced European economies”, where a soft landing looks quite possible, given some rises in productivity and “profit margins returning to pre-crises levels”. Elsewhere, tight monetary policy, fiscal supports introduced from the onset of the pandemic onward need to be withdrawn, real estate sector and banking stress need to be prepared for, and on top of that, create the conditions to handle the stresses from aging, climate, and defense.
Despite this, the IMF remains optimistic. "Meeting these challenges will not be easy. Yet Europe has shown it can overcome even the most severe obstacles when acting decisively and together. With the right policies, policymakers can secure the soft landing and raise medium-term growth prospects."
