Crisis Lessons to Remember for Europe’s Policymakers


 By Marek Belka

(Version in ελληνικά)

Let’s think now about some of the lessons from the global economic crisis for Europe’s policymakers. In my previous five blogs, I’ve discussed the challenges faced by both advanced and emerging European economies as we emerge from the acute phase of  the crisis. The questions I attempted to answer have included: In what shape and form will European integration survive the crisis? Will eastern Europe be able to sustain its remarkable catching up with living standards in western Europe?

For my final blog in this series on iMFdirect, I have decided to add a personal touch and draw on my experience as a former policymaker. So while this article builds on the previous five posts, it goes beyond them and includes some highly subjective comments on what lessons I believe the reformers in eastern Europe should take away from the crisis. And, although my primary focus is on countries outside the eurozone, it is clear that the eurozone will need to address long-term challenges, as I pointed out in my post After the Crisis, Much Still at Stake for Eurozone.

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Emerging Europe: Managing Large Capital Flows


By Marek Belka

Conventional wisdom has been that capital flows are a blessing to emerging economies, bringing needed funds to countries where investments are most productive. But if history is any guide, capital flows have proven to be highly volatile—surging in good times and collapsing in gloomy ones.

The global financial crisis has renewed the debate over the desirability of capital flows to emerging economies. Adding fuel to this debate is the fact that two of the world’s largest emerging economies—China and India—have experienced strong growth and relatively limited fallout from the crisis, all the while maintaining hefty restrictions on the flow of foreign capital.

What can be done to ensure that emerging economies still benefit from productive foreign capital, while reducing the risks associated with highly volatile flows? Can we throw out the bathwater, but keep the baby?

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IMF Draws Lessons from the Crisis, Reviews Macro Policy Framework


As the crisis slowly recedes, the IMF has started to reassess the conduct of macroeconomic policy.

The Fund has just published a paper, “Rethinking Macroeconomic Policy,” part of a series of policy papers prepared by IMF staff reassessing the macroeconomic and financial policy framework in the wake of the devastating crisis. Several of the papers will be discussed at a conference to be held in Seoul, Korea, later this month.

IMF Survey magazine has interviewed the Fund’s Chief Economist Olivier Blanchard on the reason for the rethink. “It was tempting for macroeconomists and policymakers to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy. We did not resist temptation. The crisis naturally forces us to question our earlier conclusions and that’s what we are trying to do in this paper,” he’s quoted as saying.

Paul Krugman dubbed the paper “interesting and important ” in his New York Times blog, while Richard Adams in the Guardian described it as a “break with years of economic orthodoxy” and a “stunning turnaround.”

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Reigniting Growth in Emerging Europe


By Marek Belka

As the deep recession in Europe’s emerging market countries finally comes to an end, the question on everyone’s minds is where  growth in the region will come from in the years ahead. Exports are rebounding, and domestic demand is showing signs of stabilization. Most countries 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 highly unlikely.

An unbalanced picture

During the boom years, Eastern Europe grew rapidly, but growth in many countries was rather unbalanced. Capital inflows were large, but to a great extent went to the “non-tradable” sector—in particular, real estate, construction, and banking. Capital flows boosted domestic demand rather than supply—leading to a surge in imports, current account deficits that widened to unprecedented levels, and overheating economies.

This kind of growth will not come back. The domestic demand boom came to an end in the fall of 2008.  In the global financial turmoil that followed the demise of Lehman Brothers, capital flows to Eastern Europe plunged, leading to a sharp decline in domestic demand. Further exacerbated by a decline in exports, this contributed a deep economic downturn—in the Baltics and Ukraine, GDP declined between 14 and 19 percent last year.

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Getting Ready to Join the Eurozone Club


By Marek Belka

The conventional wisdom is that, when the seas get rough, it’s better to be in a big boat. But being in the European Monetary Union (EMU) hasn’t exactly been smooth sailing for all its members. On the contrary, as I argued in my blog posted January 21, the crisis has highlighted that sound policy frameworks are more important than ever.

Let’s look at this experience from the perspective of the European Union’s new member states in the East, who are still outside the EMU but are set to join sooner or later. Should they accelerate or delay their applications? And what are the conditions for success, once they have gained entry?

Fixers and floaters

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 membership as fast as possible. They have been particularly hard hit by the crisis, partly because of their currency regime; in fact, Latvia had to rely on massive external support to pull through the crisis. But they all have managed to hold on to their long-standing currency pegs against the euro. Once in EMU, their economic policy frameworks would remain virtually unchanged. At the same time, euro adoption would remove residual currency and liquidity risks, which during the recent crisis have driven up borrowing costs, dented investor and consumer confidence, and contributed to their sharp output contractions. So for the peggers, joining the club is all gain and no (additional) pain.

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