Capital inflow challenge for emerging Europe

Published: May 11, 2010

IMF sees “moderate and uneven recovery” in coming years. 

Attracting new capital inflows will be the biggest policy challenge facing emerging Europe during the recovery, says the IMF.

In a statement to accompany its latest Regional Economic Outlook for Europe report, the organisation noted that the “seemingly unstoppable” inflows pre-crisis were no more. “In general, the worst-hit countries had the largest excess in pre-crisis inflows related to structural factors, such as the degree of income convergence or the size and structure of their economies,” the statement said.

“Their economies often had features that tended to create the illusion of fiscal space—heavily managed exchange rates, booming credit markets, and overheated growth. As policymakers became increasingly worried about vulnerabilities associated with the surge of flows, they often resorted to prudential policies that were somewhat effective in moderating the size and composition of those flows.”

Elsewhere, the IMF refers to a “moderate and uneven recovery” taking place across Europe, supported by a rebound in global trade and policy stimulus. In the near term, it adds, growth will continue to benefit from exports, fiscal support and an upswing in inventories. But with unemployment expected to increase and credit supply still constrained, consumption and investment will remain low.