Financial Cycles and the Real Economy
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Financial Cycles and the Real Economy

Lessons for CESEE Countries

Edited by Ewald Nowotny, Doris Ritzberger-Grünwald and Peter Backé

What is the link between the financial cycle - financial booms, followed by busts - and the real economy? What is the direction of this link and how salient is this connection? This unique book examines these fundamental questions and offers a paramount contribution to the debate surrounding the recent financial and economic crisis.
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Chapter 12: Finance, growth and crisis: a European perspective

Adalbert Winkler


The global financial crisis was preceded by strong growth and major advances in financial deepening, that is, a substantial rise in the ratio of private sector credit to gross domestic product (GDP), in many advanced and emerging economies. In Europe, this was the case for most countries in Central, Eastern and South-Eastern Europe (CESEE) as well as the crisis countries of the euro area periphery, notably Ireland, Spain and Greece. In the post-crisis period, Europe has been the continent with the largest decline in output growth (Ceballos et al., 2013; Blanchard and Leigh, 2013), also because the global financial crisis was followed by the euro crisis, a peculiar phenomenon in the global economy. Against this background, this chapter aims at answering two questions. Firstly, does the financial crisis trigger a need to reconsider the finance–growth nexus? Secondly, what has happened to the finance–growth nexus in Europe, that is, the countries of CESEE as well as the euro area, where pre-crisis growth associated with rapid financial deepening was followed by a deep post-crisis recession coupled with low, and in some cases even negative, credit growth rates? New econometric evidence suggests that views according to which finance is always good for growth have to be substantially qualified. Moreover, financial deepening and financial integration based on foreign banks, as was pursued in many CESEE countries in the years prior to the crisis, does not guarantee stability.

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