Focus on Central, Eastern and South-Eastern Europe
Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 13: Revisiting the European Financial Supervisory Architecture – Lessons from the Crisis in Emerging Europe
* Erik Berglof and Franziska Ohnsorge1 In spite of the immense magnitude of the global financial shock that hit emerging Europe the region avoided a traditional emerging market crisis – normally a combination of currency collapses, systemic bank runs and spikes in inflation. Given the depth of trade and financial integration, with economic growth funded by very large capital inflows and much of the banking systems controlled by foreign banks, the impact should have been much greater. Understanding the crisis and its impact in the region carries important lessons for the global debate of financial integration. It was not like emerging Europe was unaffected. The region experienced the worst output collapse since the great ‘transitional recession’ following the end of communism (see Figure 13.1). On average, real GDP contracted by about 6 per cent in 2009, and the recovery promises to be slow and fragile. Emerging Europe was the region in the world that suffered most in terms of output decline (see Figure 13.2a), in large part due to its deep trade integration with advanced countries. Especially during the first quarter of 2009, exports collapsed by 12–25 per cent across the transition region. In a sample of 12 mainly Eastern European countries, we estimate that the contraction in external demand during the first quarter of 2009 accounted for almost one half of the 6.5 per cent contraction in real GDP. But capital flows did not suddenly reverse as in emerging market crises in the past. In fact, if Ukraine and Russia...
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