Turmoil at Twenty – Recession, Recovery, and Reform in Central and Eastern Europe and the Former Soviet Union
Overview
The countries in the World Bank’s Europe and Central Asia (ECA) region, among all emerging and developing economy regions, are forecast to experience the deepest contraction as a result of the global economic recession of 2008–09. This is partly due to the region’s deep integration into the global economy across many dimensions—trade, financial, and labor flows.
The Europe and Central Asia (ECA) region, among the most integrated of emerging and developing regions, has been hit hard by the global economic and financial crisis through all three channels of integration: financial (a sudden stop in capital flows), goods and services (a sharp decline in exports), and labor (a slowdown in remittances).
The more vulnerable among the financially integrated ECA countries face two big risks: that maturing external debt might not be rolled over, and that new money to finance large current account deficits might not be available.The global recession has also reduced exports and remittances for most ECA countries, with remittances being particularly important for some low incomecountries.
Nonperforming loans picked up during 2009 in many ECA countries—up to20 percent of all loans—particularly construction and mortgage lending.With a few exceptions, the indebtedness of nonfinancial corporates is nothigher than that in comparable countries. A distinctive feature of ECA’s crisis is household debt, which in some newmember states of the EU and in Croatia has reached levels comparable to those of Ireland, Spain, and Portugal in the late 1990s.Household debt is concentrated in the upper-income quintiles.
The sharp output declines expected in most ECA countries in 2009 and thepossibility of a slow recovery will have a significant impact on the poorest andmost vulnerable households.Existing safety net programs, if they have a good track record of targeting benefits, can be expanded to reach these groups.Virtually all ECA countries operate a mix of safety nets today, but the spending, coverage, and ability to target resources vary greatly.
Capital flows to transition (and developing) countries are likely to be considerably lower than before the crisis. That makes it important for rescue and stabilization,which have dominated the policy agenda since the global economic crisis hit the region, to give way to structural reforms and make the business environment attractive to investors.
ECA’s transition countries were well endowed with public infrastructure andworkers’ education and skills, but these were increasingly perceived by firms as bottlenecks to growth during the boom years 2005–2008. The economic downturnhas temporarily released these bottlenecks, but they will become a priorityonce recovery begins.
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