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Development and crisis: the economies of former communist countries turned EU members

Development and crisis: the economies of former communist countries turned EU members. Károly Attila Soós Institute of Economics Budapest soos@econ.core.hu. Breakdown of exports by technological level , Central and Eastern Europe and „old EU”. And the crisis came.

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Development and crisis: the economies of former communist countries turned EU members

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  1. Development and crisis: the economies of former communist countries turned EU members Károly Attila Soós Institute of Economics Budapest soos@econ.core.hu

  2. Breakdown of exportsbytechnologicallevel, Central and Eastern Europe and „old EU”

  3. And the crisis came

  4. Intensiveparticipationintheinternationaleconomy Main strengthbeforethecrisis Main weaknessinthecrisis

  5. High share of foreign ownership of banks • Exposure to the probably most dangerous kind of protectionism: banks are under pressure to maintain a certain level of lending at home, and they control their total lending by lending less abroad • There is anecdotal evidence on such practices.

  6. Flexible exchange rates

  7. Severe: Estonia, Latvia, Lithuania,Romania and Hungary • Estonia, Latvia, Lithuania: rapid economicgrowth, assetpricebubble • Hungary, Estonia, Lithuania: Highlevel of opennessto trade and FDI, includingtoFDIinbanks • Hungary, Romania: highshare of loansinforeigncurrency, withflexibleexchangerates • Estonia, Latvia, Lithuania: hardbutnot „bullet-proof” (rememberArgentina) peg of currencyto €. • Estonia, Latvia, Lithuania, Hungary: lowlevel of net foreignassets

  8. The region impact „Because we are being included in the same pack, it makes me fear that, in the end, we will need aid. We fear that. We would like to be in a different region”(Mirek Topolanek, Prime Minister of the Czech Republic, quoted in „Western investors panic over region's bad news”, The Prague Post, 26 February 2009).

  9. A puzzle: whydoesthePolish zloty behaveevenworsethanthe HUF?

  10. Do we need the €? Should an EU member country at a more or less low level of real convergence and thus with a high growth potential join the Euro area? • Yes (Spain) but then overheating, asset price bubble. And a hard peg of the currency to the € (Estonia, Latvia, Lithuania) leads to similar consequences. • No (Hungary) but then the floating currency will be exposed to such fluctuations that are rather harmful for a highly open economy.

  11. Do we need the €? • Hungary’s extremely difficult situation suggests that keeping the national currency might be the worse one of the two bad options. • A part of the troubles caused by keeping the national currency was the leeway left for the government to pursue mistaken or outright mad policies: large public sector deficits and allowing massive borrowing by housebusinesses in foreign currencies: not only in €, but mostly in SFR (!) and to some extent even in Japanese Yen!!!!!

  12. Conclusion • Now, at the edge of the precipice, the Hungarian government recognises that keeping the national currency for maintaining the possibility of irresponsable policies was dangerous, and the preparation for Euro Area accession has been announced. • At the same time, the actual economic policy of the government consists of trying to hold the budget deficit below 3% of the GDP and also to reduce wage taxes (supply-side rigidities).

  13. Conclusion • Not all economists agree with this policy but changing it would require the approval of the IMF and the European Commission who prevented an unfolding currency crisis by granting a loan to Hungary in in last November. • Foreseeing any kind of outcome of any national policies in the given situation would be hard. Now, developments mostly depend on events going on outside of the region

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