Tuesday, the International Monetary Fund, or IMF, said the severe economic downturn in Europe could end during the second half of 2010, followed by a gradual recovery. It added that further policy actions in the financial sector would be essential to induce this recovery.

The measures taken to counteract the deep recession in Europe have provided a good foundation for a gradual recovery, but further actions by policy makers, particularly in the financial sector, are needed to restore market trust and confidence, and accelerate the recovery, said Marek Belka, Director of the IMF's European Department.

In its Spring 2009 Regional Economic Outlook for Europe, the IMF said economic activity is likely to contract most in emerging economies in the region this year, although activity may rebound slightly more in 2010 compared to the advanced economies of Europe.

The Washington-based lender forecast a 4% contraction in 2009 and another 0.4% fall in 2010 for Europe's advanced countries. For the emerging economies in the region, the IMF projects a 4.9% decline in 2009, with a return to growth of 0.7% in 2010. The euro area will contract 4.2% this year.

According to the IMF, inflation is expected to fall to very low levels in many countries, but outright deflation is likely to be avoided.

However, the IMF warned that risks around this overall economic scenario still remain tilted to the downside. With low inflation, consumers could regain confidence earlier, but continued weak global demand could lengthen and deepen the recession.

Belka said continued provision of liquidity and engagement in credit easing where necessary, credible loss recognition in the financial system and re-capitalization of viable institutions by the private sector, are required to bring the region's economy on to a growth path.

What is mostly needed is a robust approach to coordination, in particular on financial and regional macroeconomic stability, Belka said. Europe is facing the economic storm of a lifetime and it urgently needs to weatherproof its institutions, Belka added.

Further, he said European governments needed to subject their banks to stress tests similar to the U.S. and the UK. According to him, such tests would help restore confidence in the banking sector.

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