Becker, Torbjorn and Daianu, Daniel and Darvas, Zsolt and Gligorov, Vladimir and Landesmann, Michael and Petrovic, Pavle and Pisani-Ferry, Jean and Rosati, Dariusz and Sapir, Andre and Weder di Mauro, Beatrice. (2010) Whither growth in Central and Eastern Europe? Policy lessons for an integrated Europe. Bruegel Blueprint Series No. 11, November 2010. [Policy Paper]
This report examines the impact of the economic crisis on the countries of central and eastern Europe (CESEE) and draws out the main policy lessons. Until the crisis hit, CESEE countries had been pursuing a distinctive model of growth and catch-up through integration with the European Union, although not all countries had achieved the same level of integration with the EU. The crisis was a major challenge for the policies pursued in many CESEE countries, and the region was hit by the crisis much harder than other parts of the emerging world, and is also recovering more slowly. In chapter 1, we compare the pre-crisis development model of the central, eastern and south-eastern Europe (CESEE) region with similar countries in Asia and Latin America and study the impact of the crisis. We highlight that the CESEE growth model was fundamentally different from models in other emerging country regions, but also that it had two variants. The first, which characterised most central European countries, was by and large appropriate and sustainable. But there is a second group of CESEE countries (we call it the Baltic-Balkan group) in which the same overall growth model led to widespread misallocation of resources and unsustainable growth trajectories. These countries are undergoing a much more painful recovery from the crisis. In chapter 2 we scrutinise more closely the growth model of the region. We study the short-run challenges and the medium- to longer-run issues, focusing on behavioural adjustments occurring within the countries of the region in the wake of the crisis and on changes in the external environment. We discuss policy issues to make the re-oriented growth model sustainable and successful. Chapters 3, 4 and 5 examine three key policy areas: exchange-rate policy, financial stability and fiscal sustainability. We identify a strong role for exchange-rate policy both in the unsustainable pre-crisis developments of a number of countries and in their dramatic response to the crisis. However, concerning the other two main policy areas, it is true more generally that even more conservative domestic financial regulation and supervision and fiscal policy could not have crisis-proofed those CESEE countries which, even before the crisis, had double-digit current-account deficits. Looking forward, improving supply side conditions and competitiveness will be a key challenge for most countries in the region. Massive cross-border holdings in CESEE banks pose significant challenges to financial regulation and we highlight a large number of unresolved issues, while for fiscal sustainability we are cautiously optimistic, but certainly more optimistic than most analysts who call for overly strict, and hence pro-cyclical, fiscal policy. In our concluding chapter 6, we raise policy issues for the CESEE countries and the EU. The general conclusion is that the benefits of EU integration for countries that are catching up are conditional on the quality of national policies and of the EU framework itself. In both respects we point out past failings and suggest strategic improvements. Reorienting the growth model in those countries that entered a shunt-line before the crisis will be hard because of their legacies, but that there is no other path to follow in order to make the EU’s eastern enlargement a lasting economic success story.
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