For Your Eyes Only: Three Jobs Not to Defer in 2013


David LiptonBy David Lipton

(Versions in  عربي, 中文, EspañolFrançaisРусский, 日本語)

With the New Year, we all hope to put the global financial crisis behind us. We also need to do more to secure our future.

Beyond our current economic and financial problems, there are long-term issues that we all know about, but that get too little attention in an era when policymakers are so fully engaged in slogging away at more immediate problems. Unfortunately, long-term issues unaddressed today will become crises tomorrow.

So we had better lengthen our focus, see what looms on the horizon, and do more to steer the global economy in a better direction.

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Taking Away the Punch Bowl: Lessons from the Booms and Busts in Emerging Europe


By Bas B. Bakker and Christoph Klingen

With all eyes on the euro area, it is easy to forget that only a few years ago the emerging economies of Europe, from the Baltic to the Black Sea, went through a deep economic and financial crisis. This crisis is the topic of a new book that we will introduce to the public this week in Bucharest, London, and Vienna.

One lesson is that your best chance to prevent deep crises is forcefully addressing booms before they get out of hand. Another is that even crises that look abysmal can be contained and overcome— policies to adjust the economy and international financial support do work.

In the half decade leading up to the crisis, easy global financial conditions, confidence in a rapid catch-up with western living standards, and initially underdeveloped financial sectors spawned a tremendous domestic demand boom in the region. Western banking groups bankrolled the bonanza, providing their eastern subsidiaries with the funds to extend the loans that fueled the domestic boom. Continue reading

Mind The Gap: Policies To Jump Start Growth in the U.K.


By Ajai Chopra

The U.K. economy has been flat for nearly two years. This stagnation has left output per capita a staggering 14 percent below its precrisis trend and 6 percent below its pre-crisis level.

Weak growth has kept unemployment high at 8.1 percent, with youth unemployment an alarming 22 percent.

The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis.

Our analysis of such hysteresis effects shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP. 

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Lost & Found in Eastern Europe: Replacing Funding by Western Europe’s Banks


By Bas Bakker and Christoph Klingen

With Western Europe’s banks under pressure, where does this leave Europe’s emerging economies and their financial systems that are dominated by subsidiaries of these very same banks?  There is little doubt that the era of generous parent-funding for subsidiaries is over.  But parent bank deleveraging—selling off assets, raising capital, and reducing loans, including to their subsidiaries—need not translate into a reduction of bank credit in emerging Europe.

A credit crunch can be avoided as long as parent banks reduce exposures gradually and domestic deposits, other banks, and local financial markets fill the void. Policymakers should create the conditions for this to happen.

The ties that bind

The dependence of the banking systems in emerging Europe on Western European banks is well known:

  • Ownership— foreign banks control more than half of the banking systems in most of Central, Eastern, and Southeastern Europe. Their share exceeds 80 percent in Bosnia, the Czech Republic, Croatia, Estonia, Romania, and Slovakia. Only in Russia, Ukraine, Belarus, Moldova, Slovenia, and Turkey do they not dominate.

Global Growth Hits a Soft Patch


By Olivier Blanchard

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Today we’re in Sao Paulo, Brazil, to release our update to the IMF’s World Economic Outlook.

Despite a mild slowdown, the global economic recovery continues but the road to health will be a long one.  Downside risks, both old and new, are increasing.

Our world forecast is 4.3% growth for 2011, and 4.5% for 2012, so down by 0.1% for 2011, and unchanged for 2012, relative to April.  This figure hides very different performances for advanced economies on the one hand, and for emerging and developing economies on the other.  Continue reading

Toughing It Out: How the Baltics Defied Predictions


By Christoph Rosenberg

Two years ago, the eyes of the financial world were not on Europe’s Western periphery but on its North-Eastern corner. The three Baltic states—Estonia, Latvia and Lithuania—were among the first victims of the global financial crisis.

After a spectacular boom, with several years of Chinese-style growth rates, these small and open economies faced an equally spectacular bust. Credit―and with it property prices, consumption, and investment―collapsed. Exports were hit by the global depression. And the financial sector came under severe stress. Indeed, Latvia was forced to nationalize its largest domestic bank and had to ask for a bailout from the European Union and the IMF.

The conventional wisdom at the time was that these three countries would have to give up their long-standing currency pegs against the euro and devalue. After all, this is what countries facing a trade and financial shock most often choose to do.

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