The current European economic recession is showing signs of bottoming out, but the recovery is likely to be slow and fragile, the International Monetary Fund (IMF) said on October 3 in its October 2009 Regional Economic Outlook (REO) for Europe.

Helped by rebounding confidence and a tentative pick up in global trade, the contraction in Europe appears to have ended at mid-2009 and is expected to give way to a moderate recovery in 2010 and more solid growth returning only afterwards, the report said.

"The long recession shows signs of finally bottoming out. But the recovery will likely be slow and fragile because the pickup in demand from Asia can hardly substitute for the pre-crisis appetite for imports of U.S. consumers. Europe cannot count on exports alone to drive the recovery. In addition, credit remains scarce, unemployment is rising, and the crisis has reduced Europe’s growth potential," said Marek Belka, Director of the IMF’s European Department.

In advanced economies this should result in an average decline of -4.0 per mcent in 2009 and growth of 0.5 per cent in 2010. In emerging Europe, activity is expected to contract by -6.6 per cent this year, but growth should return to most countries in 2010, with GDP increasing by an average 1.7 per cent.

The report calls on policymakers to focus their attention on securing the recovery.

In the near term, they should adopt a more resolute approach to assessing the balance sheet risks faced by banks, and take action to recapitalize or restructure viable institutions and resolve others. "The economic recovery might be weaker than hoped for unless the financial sector problems are dealt with promptly and effectively," Belka said.

Macroeconomic policies also need to sustain the upswing while preparing for an exit.

The fragility of the recovery will require fiscal policy to continue with planned stimuli and letting automatic stabilisers work, but sustainability concerns demand a strong consolidation effort once the recovery has firmed up.

And monetary policy will need to remain supportive but, once financial conditions normalise and the recovery is firm, attention needs to be given to exiting the unprecedented market interventions forced by the crisis.

Clear communication of this exit strategy will be essential, the report says.

"There is little rest for the weary. The fragility of the upswing will require policymakers’ steady hand to maintain support for activity while preparing to exit from the policies put into place during the crisis. Getting its timing and the pace right will require careful judgment," Belka said.

"But, overall, moving fast to repair the damage the crisis has caused to potential growth is what ultimately matters most. Only lifting the long-run growth potential of Europe will put the crisis behind us for good," he added. To achieve this, policymakers in advanced countries should pursue opportunities to reform labour and product markets, while those in emerging economies should focus on developing a new business model that rebalances the sources of growth and financing."