Banks―and the loans they provided in the run-up to the crisis―are at the heart of Europe’s problems today. Yet it would be wrong to conclude that the crisis was caused by too much financial integration. In fact, the real problem may have been that there was too little financial integration. Policies to promote deeper integration of Europe’s banks―including through cross-border merger and acquisitions―should be part of the solution. Further progress in strengthening the institutions of the European Union (EU) is also needed. What’s more, further European economic integration would unlock substantial efficiency gains, which would help to restore growth in the crisis-affected countries.
For a decade or more, we at the IMF have grappled with the idea that very large capital flows into successful emerging market countries were almost inevitable and would prove extremely difficult to manage. Since these topics were first broached at a theoretical level, we have witnessed developments in a number of emerging economies in Europe that reinforce the concerns and underscore the implications for policy. Two lessons may be learned from the experience. First, the choice between fixed and flexible exchange rates is important, but perhaps not for reasons that are usually put forward. Second, monetary policy—and policy to stabilize the economy more generally—needs substantial reinforcement.
Almost unnoticed amidst the difficulties in western Europe, the other half of the continent has begun to recover from the deepest slump in its post-transition period. In our fall 2010 Regional Economic Outlook, the emerging economies in central and eastern Europe are projected to grow by 3¾ percent this year and next—a relief after the 6 percent decline in 2009. But the boom years before the crisis had left much of the region addicted to foreign-financed credit growth, making it very vulnerable to a disruption in capital inflows. So, as the region emerges from the crisis, the big question is how do we avoid a repeat?
The varied experience of emerging market economies during the global financial crisis underscores an important lesson: good policies beget good outcomes. Investing during good times to develop a sound policy framework that delivers stronger fundamentals and lower vulnerabilities yields large dividends during crises. In the current crisis, low-vulnerability countries had lower output declines, more space to undertake countercyclical policies, and quicker recoveries.
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, the crisis has highlighted that sound policy frameworks are more important than ever. I 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.
The Program of Seminars takes place outside the formal framework of the Annual Meetings. But to many people, they were the main reason for making the trip to Istanbul.
The program's October 4 offering included a first-hand perspective of how three emerging market countries—Turkey, Slovakia, and Ukraine—have weathered the crisis. We also got a glimpse of the methodology the IMF is using to become better at sounding the alarm if it sees new vulnerabilities building up in the world economy.
More Europe, not less
Ukraine was running a high fiscal deficit at the outset of the crisis, which made it vulnerable when the global economy came unstuck, Vice Prime Minister Hryhoriy Nemyria said. The lack of progress on structural reforms had reinforced the external shock, and had brought home just how dependent the country was on just one sector, steel, which accounts for 40 percent of all export earnings. (more…)