Europe faces many years of weak growth: IMF

ISTANBUL - Europe will feel the effects of the global economic and financial crisis well beyond the next year, hampered by slower growth and high unemployment, the International Monetary Fund (IMF) said Friday.

In a report on the state of the European economy, the IMF said most countries have emerged from a recession considered the worst since World War II, thanks to “massive” fiscal stimulus efforts by governments.

But the recovery will be slow and fragile in part because of Europe’s dependence on exports to Asia and the US.

Marek Belka, director of the IMF’s European Department, warned that a recent pickup in global trade could be “short-lived”, while US consumers will never return to the kind of spending levels seen before the crisis.

“So continuation of the recovery rests squarely on the shoulders of European consumers and investment,” Belka told reporters in Istanbul, where the IMF and World Bank are holding their annual meetings.

“In addition, credit remains scarce, unemployment is rising, and the crisis has reduced Europe’s growth potential,” he said.

The IMF predicted that wealthier European countries will inch forward with growth of 0.5 percent in 2010 after shrinking some 4 percent this year.

Emerging countries in Central and Eastern Europe have suffered much more from the crisis, shrinking 6.6 percent this year, but will recover to a higher growth rate of 1.7 percent in 2010, the IMF said.

But Belka said the two regions are inextricably linked: Emerging Europe’s recovery “will depend heavily on the robustness and sustainability of the recovery in Western Europe.”

The report warns that Europe’s troubles are only just beginning, as the crisis will hold growth below its potential for many of the following years. The 16-member eurozone will face an unemployment rate of nearly 12 percent by 2011.

Much of Europe was dragged into a devastating recession by a financial crisis that had its origins in the US housing market and the collapse last September of investment bank Lehman Brothers.

That crisis could force major underlying changes: Countries with major financial centres like Britain are unlikely to see a return to the pre-crisis boom; Germany and others that depend on exports can no longer rely on the US consumer to fuel their economies. Emerging Europe must get used to less of an influx of capital from abroad.

Joaquin Almunia, the European Union’s economic and monetary affairs commissioner, said Thursday that the crisis had halved potential growth levels in the eurozone to “around 1 percent.”

Potential growth is defined as the “natural” rate of gross domestic product growth when extra fiscal stimulus - or discretionary spending - is excluded.

The IMF would not put a figure to Europe’s mid-term losses, but said reviving that growth potential was critical to its long-term recovery.

“Only lifting the long-run growth potential of Europe will put the crisis behind us for good,” Belka said.