The headline on which most people have seized is about the signs, however faltering they sometimes seem, that Europe’s economy is on the mend.

The trouble is the truth that does not fit comfortably into a headline, that more than ever, there are two Europes – one developed and one emerging, and the latter has taken a beating from which it will not be easy to recover.

This is clear from separate sets of discussions in the post-G20-Pittsburgh world: at the October 1 and 2 meeting of European Union finance ministers and central bank governors (Ecofin) in Goteborg, Sweden, and the October 6 and 7 annual World Bank-International Monetary Fund summit in Istanbul, Turkey.

Marek Belka, director of the IMF’s European Department, told an October 3 news conference ahead of the Istanbul event that "the recession in Europe is coming to an end, it seems" and that the Fund’s growth forecast for 2009 and 2010 had been revised upward by about 0.5 per cent.

But in emerging Europe, according to the IMF forecast, the contraction on average this year would be deeper, "but the rebound also will be stronger next year".

Specifically, in emerging Europe, activity is expected to contract by 6.6 per cent in 2009, but growth should return to most countries in 2010, with GDP increasing by an average 1.7 per cent, according to the IMF’s October 2009 Regional Economic Outlook (REO) for Europe.

"The picture in emerging Europe, however, is much more diverse," Belka said.

"What is common to the region is that the shocks were broadly uniform, and that the recovery, in most of these countries, will depend heavily on the robustness and sustainability of the recovery in Western Europe, but almost everything else is different. The starting point, the conditions, and the shape in which they entered the crisis was very differentiated: different currency regimes and varying degree of imbalances accumulated in the run-up to crisis."

Belka said that the financial system was still fragile, credit was scarce, the future of capital inflows to emerging Europe uncertain.

Several countries – among them Bulgaria – needed to rethink their business model, given the key question about the sources of future growth.

On policy questions, a more resolute approach was needed to assessing the balance sheet risks faced by banks and for action to be taken to recapitalise or restructure viable institutions.

In emerging Europe, adequate cross-border funding was key, which required, among other things, proper co-ordination between financial institutions in both home and host countries.

The REO said that emerging Europe was likely to face higher risk premiums and a more volatile environment in the aftermath of the financial crisis, as investors paid increasing attention to domestic policies in individual countries.

"Adopting policies that lower uncertainty about the state of the financial system and reduce fiscal discretion would go a long way in addressing concerns and will yield a ‘double dividend’ in improving prospects for long-term growth," the IMF said in the report.

Separately, in a joint statement on October 5, the World Bank, European Bank for Reconstruction and Development and the European Investment Bank issued a firm warning against excessive optimism about economic recovery, saying that there were challenges to recovery in emerging Europe.

"There are increasing risks of a major credit crunch in the region," the joint statement said.

The statement said that banks in Central and Eastern Europe should tackle bad loans and "undertake loan restructuring on a commercial basis and recapitalise as needed".

Earlier, at their informal meeting in Sweden at the beginning of October, EU finance chiefs sought to take forward some of the elements emerging from the September G20 meeting in Pittsburgh.

According to a statement by the Swedish presidency of the EU at the end of the two-day meeting, those taking part had discussed the signs that the economic and financial crisis had started to "bottom out" and that a tentative recovery was underway, although the global financial system was still fragile and economic activity remained weak.

Given a presentation on the EU-wide stress test, they "welcomed that banks in the EU are broadly able to withstand the crisis, but emphasised that banks need to continue to strengthen their financial positions".

They agreed that at their meeting later in October, they would return to the issue of cross-border stability arrangements.

Also discussed was a key item, the European Commission’s proposals for a new structure for financial supervision, the European Systemic Risk Board, which Ecofin hopes to reach a "general approach" on at its October 20 meeting, so that it can report on the issue to the European Council meeting on October 29 and 30.

In parallel, negotiations on the European System of Financial Supervision will be aimed at achieving a "general approach" by the time of the December Ecofin meeting.

"It is our intention to report an agreement for the whole financial supervision package to the European Council in December, which will send a strong signal to our global partners that the EU has now taken its responsibility to strengthen the European supervisory framework," Swedish finance minister Anders Borg said.