As Europe embarks on its projected recovery, wide differences in economic performance and financial stresses will persist, IMF officials say. Meanwhile, the European Commission in its interim economic forecast, says the economic outlook for the EU remains broadly unchanged with the recovery in progress but remaining "fragile." GDP (gross domestic product) is projected to grow at 0.7% in both the EU and the Eurozone in 2010. Inflation projections also remain largely unchanged at 1.4% and 1.1% in the EU and the Eurozone respectively but the Commission says uncertainty surrounding these projections remains rife, as recent developments in financial markets illustrate.

Commissioner for Economic and Monetary Affairs Olli Rehn said on Thursday: "The recovery of the EU economy is materializing but it is still fragile. Putting the European economy back on a strong and sustainable path should be our overarching objective. For this we need to work on two fronts: the economic recovery and the consolidation of our public finances. The new Europe 2020 Strategy leading to the modernization of our economies should go hand in hand with the consolidation of our public finances. This is necessary for sustainable growth and job creation."

The Commission said growth projections for the first half of this year have been revised slightly upward in the Commission’s forecast for both the EU and the Eurozone. But because of marginal downward revisions for the second half of 2010, the projected rate of GDP growth in 2010 as a whole remains broadly unchanged at 0.7% in both areas. This is calculated on the basis of updated projections for France, Germany, Italy, the Netherlands, Poland, Spain and the United Kingdom, which together account for about 80% of the EU’s GDP.

According to the interim forecast, world growth is set to hit a soft patch, due to the gradually fading effect of the stimulus measures and because of the inventory cycle. Differences across countries remain sizeable, with a markedly more solid recovery for emerging economies, on the back of resuming capital inflows, and the return of investors' risk appetite. While the EU's external environment is recovering faster than expected, it remains to be seen to what extent this will help the EU this year.

The IMF says during the crisis, countries inside the Eurozone benefited from the relative stability of the euro. Emerging market countries ranging from Latvia to Hungary and Romania had to seek emergency assistance from the European Union and the IMF. Today, with the worst of the crisis behind us, markets are taking a new, critical look at countries within the Eurozone, with Greece, Spain, and Portugal currently in the headlines. Where this reappraisal will lead remains to be seen. New challenges are also arising for many emerging economies. While the exact nature of those challenges differs substantially from country to country, there are common themes.

In a recent series of blog posts, the Director of the IMF’s European Department, Marek Belka, a former finance and prime minister of Poland, offers his take on the lessons policymakers should learn from the crisis. Below is a short summary of each of his six postings.

Unwinding Crisis Policies in Europe: Are We There Yet?
Much is riding on getting the timing of the exit right from the extraordinary policies used to combat the global economic and financial crisis. Exiting too early may jeopardize the recovery. But exiting too late may sow the seeds for the next crisis. And exiting in an uncoordinated fashion will lead to a renewed build up of financial instability.

With the recovery still fragile, fiscal and monetary policy should continue to support the recovery. Yet we do need to worry about the surge in government indebtedness and the potential for an adverse shift in sentiment about fiscal sustainability. To avert this, countries need to announce now, credible plans for fiscal consolidation.

In the financial system, we must ensure that the extraordinary support provided to banks and other financial institutions does not turn into an addiction. Thus, the time has come to begin to gradually unwind these policies. Meanwhile, we should not forget about the need for fundamental reforms in the financial sector.

After the crisis, much still at stake for the Eurozone
The euro - - and the European Central Bank (ECB) - - proved important safeguards against the spread of the crisis. Countries whose currencies would likely have been subject to severe market gyrations had they not been part of the Eurozone held their ground. But as the crisis progressed, it became clear that the Eurozone countries were affected in very different ways. Markets took notice and the premiums charged on sovereign bonds diverged.

The ECB has established a sound monetary framework and has proven itself responsive to the enormous challenge we have recently faced. The relatively benign global economic conditions in the euro’s first decade helped allay concerns about divergent economic performance within the Eurozone. But that reprieve no longer exists. The ECB and the European Union are in the process of establishing new institutions and rules to create a stronger Europe. The success of these efforts will determine Europe’s course and the role of the euro in its next decade and beyond.

Getting ready to join the Eurozone club
Should the European Union’s new member states accelerate or delay their applications to join the Eurozone? What are the conditions for success, once they have gained entry? The answer to the first question depends in large part on the currency regime.

For small and very open countries with fixed exchange rates - - the three Baltic republics and Bulgaria - - there is really no alternative to seeking EMU (European Monetary System) membership as fast as possible. Estonia and Lithuania have demonstrated the ability to maintain fiscal discipline and even Latvia has taken tough adjustment measures in response to the crisis.

The picture is less clear cut in the larger new member states, which on the whole have been served well by their flexible exchange rate regimes. Potential new applicants should ask themselves: are we ready for life in the Eurozone? While there are differences between countries, several factors augur well. The new member states have proven nimble in past years at adjusting their trade and production structures to new opportunities, and they have become increasingly integrated both with EMU members and other new member states. Productivity levels have increased, job markets are flexible, and labour mobility, including across borders, is high.

Reigniting growth in emerging Europe
Most countries in central and eastern Europe will see positive GDP growth this year - - a stark difference from 2009. But a return to the high growth rates that preceded the crisis is unlikely. Exports are now recovering, but domestic demand is projected to stay weak. Experience tells us that once credit booms end, consumers tend to rein in their spending as they pay off their debts.

To reignite growth, emerging Europe must focus on manufacturing and tradable services, rather than construction, real estate, and banking. Countries in central and eastern Europe will need to find niches in the world market in which they can specialize and catch up by increasing their share in world markets, and reduce their dependence on non-tradable sectors to drive growth.

Emerging Europe: managing large capital flows
In emerging Europe, the transition from planned economies to capitalism has resulted in a rapid and near-complete openness to trade and foreign capital. In the years before the crisis, foreign money flowed generously to the region and to banks in particular. This precipitated a credit boom, which turned to bust when the crisis hit. And although the withdrawal of foreign capital was less aggressive than initially feared, it is clear that the large pre-crisis capital flows to the region were unsustainable and destabilizing.

In our highly globalized economy, large and rapid flows of money across borders are here to stay. The challenge for emerging economies is to find ways to manage these flows so that they don’t exacerbate boom-bust cycles, while still leaving the door open to productive (and hopefully stable) investment. This means using all available tools, particularly greater use of prudential regulations, and keeping an open mind when it comes to capital controls.

Crisis lessons for Europe’s policymakers
In his final blog posts, Belka draws on his own experience as a former policymaker and offers lessons he believes reformers in eastern Europe should take away from the crisis:

• Good policies and strong institutions matter:Countries with unsustainable fiscal policies and weak institutions were the first to face difficulties.
• Sound public finances are created in good times:If policymakers think growth and prosperity is time for relaxing and enjoying, rather than to save for a rainy day, they can forget about fiscal stimulus when it’s needed or even allowing automatic stabilizers to do their job during a recession.
• Capital inflows are beneficial for growth, but some are better than others:Those that increase output potential deserve support, but those that just stimulate demand have to be watched carefully and kept in check if necessary.
• Selling domestic banks to foreigners (highly controversial initially in some emerging markets) turned out to be a rather good idea:What really matters is whether banks have a sustainable business model―one that depends on stable funding (as provided by strong parents) rather than the global wholesale market.
• Self-regulation of the private sector has its limits:The ultimate responsibility for ensuring stability and fair competition rests with the state.
• Pragmatism, pragmatism, pragmatism:Policy advice to emerging economies must be refined. As these economies advance, so does the sophistication of their policymakers.

In times of need, you can count on the IMF. The Fund has listened, learned, and adapted. It is not a bad cop, but rather a doctor - - there to help heal, even if it may hurt in the short term.

A European Monetary Fund?