Emerging Europe and the Global Crisis: Lessons from the Boom and Bust.
Why was the slump in Emerging Europe so deep? Why did the banking and currency crises that many predicted not happen? Why were some countries in the region so much more affected than others? What lessons did we learn and how can we avoid a repeat? Bas B. Bakker, division chief of the Emerging Europe Regional division in the IMF's European Department began by tackling these suppositions at a CASE Policy Research Seminar, Oct 25, 2010. In answering these questions he concluded with four lessons Emerging Europe can take away from the crisis to avoid its recurrence.
Firstly, he explained that credit booms can be costly; in the long run countries with credit booms have experienced higher volatility and lower average growth. Unfortunately, his second lesson shows that slowing credit growth with regulation is challenging because efforts are often circumvented by foreign-currency loans, meaning that the emphasis on regulation should be a cross-boarded approach. Thirdly, fixed exchange rate regimes only compound the obstacles in slowing credit growth because they limit the ability of these countries to use monetary policy to restrain booms. Lastly, Dr Bakker advocates building larger fiscal surpluses in boom years in order to cushion budgets and prepare governments to undertake greater countercyclical measures during economic downturn.
