European countries are likely to recover from the economic crisis at varying speeds in 2010 although some will need to move sooner than others to rein in their budget deficits, a senior IMF official said on Monday. Marek Belka, director for the International Monetary Fund's European Department, said while some stimulus measures will still be needed next year to help the recovery strengthen, 2011 will be the year for fiscal consolidation.
He said countries such as Greece, Ireland and Spain, whose debts are extremely high, cannot wait until 2011 to take control of their ballooning deficits and will need to act sooner. "The year 2010 will be dominated by the challenge of how to strike a balance between continuing to support the economy and gradually phasing out unconventional measures," said Belka, a former Polish prime minister.
"Here I am thinking about unconventional financial and monetary measures rather than fiscal stimulus," he said, adding that the European Central Bank was correctly not signalling any withdrawal from monetary easing anytime soon. Belka said inflation expectations are well anchored and inflation levels are expected to stay close to 1 percent in the near future. He said the European banking sector still needed fixing but now was the time to start rolling back guarantees of bank liabilities and other aid measures introduced at the start of the financial crisis in 2007.
Policymakers should ensure that banks are well capitalised to deal with the loan losses ahead and are in a position to extend credit as the recovery takes hold, he added. "Weak banks should be required to raise capital and restructure or face resolution," Belka added. He said the labour market in Europe would likely start improving late in 2010 and into 2011.
For countries hardest hit by the crisis and where unemployment spiked, the improvement in the labour market will be only gradual in 2010, Belka said. Looking forward, Belka said the IMF's advice to Europe is to support economic activity for now, plan for a careful exit, and deal with impaired financial institutions more forcefully than is being done now.