Eastern Europe Financial Crisis
QUESTION 1: Eastern Europe is currently in severe financial distress. Discuss why the crisis has affected the Eastern European countries in such a strong way. Reflect on the interdependency between the members of the European Union. How does situation in Eastern Europe affect countries in Western Europe?
The economic conditions of the 20 countries comprising of the Central and Eastern Europe region faced exceptional deterioration during the global financial and economic crisis. Reports from 2009 indicate that only Albania, Belarus and Poland avoided the economic crisis, while the region’s GDP sunk by 6.2% year-on-year (IMF 2010). After almost over a decade of outperforming worldwide growth, in 2009 almost every country in the region was either in or on the verge of recession. This sudden change in the financial and economic state of the region, resulted in social unrest and doubts about the future political and economic reforms in these countries (World Bank, 2010)
According to reports by the International Monetary Fund (2008) and the European Central Bank (2008), many of the factors that led to the financial crisis in the United States generated a similar crisis in Europe. Low interest rates and an expansion of financial and investment opportunities due to aggressive credit expansion, the growth in the complexity of mortgage securitisation, and the loosening of underwriting standards along with expanded linkages among national financial centres leading to board expansions in credit and economic growths. This growth led to an increase in the values of equities, commodities and real estate. With time, the combination of high commodity prices and increasing housing costs, led to the reduction of expenditures by consumers. This led to a slowdown of economic activity and finally to the reduction in housing prices. As a result there was a large scale downgrade in the ratings of subprime mortgage-backed securities and the closure of hedge funds with subprime
The economic conditions of the 20 countries comprising of the Central and Eastern Europe region faced exceptional deterioration during the global financial and economic crisis. Reports from 2009 indicate that only Albania, Belarus and Poland avoided the economic crisis, while the region’s GDP sunk by 6.2% year-on-year (IMF 2010). After almost over a decade of outperforming worldwide growth, in 2009 almost every country in the region was either in or on the verge of recession. This sudden change in the financial and economic state of the region, resulted in social unrest and doubts about the future political and economic reforms in these countries (World Bank, 2010)
According to reports by the International Monetary Fund (2008) and the European Central Bank (2008), many of the factors that led to the financial crisis in the United States generated a similar crisis in Europe. Low interest rates and an expansion of financial and investment opportunities due to aggressive credit expansion, the growth in the complexity of mortgage securitisation, and the loosening of underwriting standards along with expanded linkages among national financial centres leading to board expansions in credit and economic growths. This growth led to an increase in the values of equities, commodities and real estate. With time, the combination of high commodity prices and increasing housing costs, led to the reduction of expenditures by consumers. This led to a slowdown of economic activity and finally to the reduction in housing prices. As a result there was a large scale downgrade in the ratings of subprime mortgage-backed securities and the closure of hedge funds with subprime
References: Archick, K 2015, ‘The European Union: questions and answers’, Congressional Research Service, p. 4. Aslund, A 2011, Lessons from the East European financial crisis 2008–10, Peterson Institute for International Economics, viewed 09 May 2015, <https://www.piie.com/publications/pb/pb11-09.pdf>. European Central Bank 2008, EU Banking Structures: October 2008, p. 26. IMF 2010, World Economic Outlook Database, viewed on 09 May 2015, <http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx>. International Monetary Fund 2008, ‘Europe: addressing the crisis’, Regional Economic Outlook: May 2009, p. 19-20. Roche, D 2009, ‘Eastern Europe and the financial crisis’, The Wall Street Journal, 28 March 2009, viewed 09 May 2015, < http://www.wsj.com/articles/SB123819932316462089>. Roubini, N 2009, ‘Will the economic crisis split east and west in Europe?’, Forbes, viewed 09 May 2015, < http://www.forbes.com/2009/02/25/eastern-europe-eu-banks-euro-opinions-columnists_nouriel_roubini.html>. World Bank 2010, ‘Crisis, Finance, and Growth’, Global Economic Prospects 2010, p. 123.