The Failed Political Economy of the Euro Crisis

The euro crisis has been extensively discussed in terms of economics, finance, political intrigues, and European institutions, but a key aspect—the political economy of the crisis—has received little attention. Politicians and social scientists from emerging economies, especially Eastern Europe, look with amazement at this oversight.Euro crisis, economy, political economy

The Last Shall Be the First: The East European Financial Crisis

This book deals with the financial crisis in Eastern Europe that erupted in the fall of 2008 and abated in the spring of 2010. It concentrates on the ten new eastern members of the European Union. The causes of the crisis posed no mysteries. This was a typical credit-driven boom-and-bust cycle that led to excessive current account deficits. When global liquidity dried up, the overheated East European economies faced a sudden stop of financial inflows. * What is remarkable is how well these countries have steered out of the crisis. The worst hit countries--Latvia, Lithuania and Estonia-- refused to devalue their currencies and instead pursued internal devaluations, successfully cutting public wages and expenditures. They swiftly turned large current account deficits into substantial surpluses and minimized their inflation. The political economy of crisis resolution has been equally striking. The public accepted significant hardship with minimal protests. Eastern Europe's fragmented proportional parliaments made it possible to quickly change governments when the incumbents fall short. Unstable coalition governments proved eminently able to pursued resolute anticrisis policies. They carried out impressive fiscal retrenchment without any public reaction against capitalism or globalization. The East European economies have come out leaner and more efficient. * The International Monetary Fund stands out as the great victor on the international stage, having revived the old Washington consensus of a few rudimentary financial conditions, such as tenable exchange rate policy and reasonable fiscal and monetary policy, while it allowed well-governed countries larger public deficits during the crisis and offered much more financing. The European Commission entered into a successful partnership with the IMF, allowing the IMF to take the lead, while providing substantial financing. The great disappointment in the East European financial crisis has been the European Central Bank, which needs to reconsider its policies outside the eurozone to become more proactive.

How Can the EU Emulate the Positive Features of the East Asian Model?

The spectacular, sustained economic growth experienced in several East Asian countries leads to the question what Europe can learn from the East Asian economic model. Three advantages of the East Asian model stand out: small social transfers, low taxation and free labor markets. The superiority of such policies is now widely accepted, and the question is how they can be emulated by Europe. Traditionally, the EU has taken a top-down approach to decision making and policy implementation, which is characteristic of the Lisbon Agenda, which has not made much progress. However, after the powers of the European Commission have been weakened in the last few years competition between national governments has spurred swift tax cuts and faster deregulation of labor markets. Bottom-up reforms arising from competition should be more readily accepted in the EU.EU economy, East Asia economic model, economic growth, comparative economics, economic policy

The East European Financial Crisis

This paper discusses the global financial crisis of 2008/9 in thirteen countries, the ten new EU members that previously were communist and the three countries of Western former Soviet Union. Their problems were excessive current account deficits and private foreign debt, currency mismatches, and high inflation, while public finances were in good shape. The dominant cause was fixed exchange rates. Many lessons can be drawn from this crisis. A dollar peg makes no sense in this part of the world. The five currency boards in the region have lacked credibility. By contrast, inflation targeting has worked eminently. The euro has proven credible both in the countries that officially adopted it and in the countries that adopted it unilaterally. With the exception of Hungary, all the countries in the region have displayed decent fiscal policies. No government should accept large domestic loans in foreign currency and they can be regulated away. The IMF has successfully returned to the original Washington consensus with relatively few conditions: a reasonable budget balance and a realistic exchange rate policy, while focusing more on bank restructuring. The most controversial issue is the role of the ECB. The ECB should facilitate the accession of willing EU members to the euro by relaxing the ERM II conditions.Financial crisis, macroeconomics, exchange rate policy, Eastern Europe, transition

Lessons from the East European Financial Crisis, 2008-10

In the fall of 2008, Central and Eastern Europe became a flashpoint in the global financial crisis. The positive surprise, however, is that after about two years, the crisis in the region had more or less abated. Public attention moved from Latvia, Estonia, and Lithuania to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The issue was no longer why Latvia must devalue but what Greece could learn from Latvia. What lessons can be drawn from the resolution of the financial crisis in Eastern Europe for the rest of the European Union and the world at large?

Russia's Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed

The Russian revolution, collapse of the Soviet Union, and Russia's ensuing transformation belong to the greatest dramas of our time. Revolutions are usually messy and emotional affairs, challenging much of the conventional wisdom, and Russia's experience is no exception. This book focuses on the transformation from Soviet Russia to Russia as a market economy, and explores why the country has failed to transform into a democracy. It examines the period from 1985, when Mikhail Gorbachev became the Soviet Union's Secretary General of the Communist Party, to the present Russia of Vladimir Putin. Aslund provides a broad overview of Russia's economic change, highlighting the most important issues and their subsequent resolutions, including Russia's inability to sort out the ruble zone during its revolution, several failed coups, and the financial crash of August 1998.

How Ukraine Became a Market Economy and Democracy

One of Europe's old nations steeped in history, Ukraine is today an undisputed independent state. It is a democracy and has transformed into a market economy with predominant private ownership. Ukraine's postcommunist transition has been one of the most protracted and socially costly, but it has taken the country to a desirable destination. * Aslund's vivid account of Ukraine's journey begins with a brief background, where he discusses the implications of Ukraine's history, the awakening of society because of Mikhail Gorbachev's reforms, the early democratization, and the impact of the ill-fated Soviet economic reforms. He then turns to the reign of President Leonid Kravchuk from 1991 to 1994, the only salient achievement of which was nation-building, while the economy collapsed in the midst of hyperinflation. The first two years of Leonid Kuchma's presidency, from 1994 to 1996, were characterized by substantial achievements, notably financial stabilization and mass privatization. The period 1996-99 was a miserable period of policy stagnation, rent seeking, and continued economic decline. In 2000 hope returned to Ukraine. Viktor Yushchenko became prime minister and launched vigorous reforms to cleanse the economy from corruption, and economic growth returned. The ensuing period, 2001-04, amounted to a competitive oligarchy. It was quite pluralist, although repression increased. Economic growth was high. * The year 2004 witnessed the most joyful period in Ukraine, the Orange Revolution, which represented Ukraine's democratic breakthrough, with Yushchenko as its hero. The postrevolution period, however, has been characterized by great domestic political instability; a renewed, explicit Russian threat to Ukraine's sovereignty; and a severe financial crisis. The answers to these challenges lie in how soon the European Union fully recognizes Ukraine's long-expressed identity as a European state, how swiftly Ukraine improves its malfunctioning constitutional order, and how promptly it addresses corruption.

The United States Should Establish Normal Trade Relations with Russia

The potential benefits to the US economy from Russia's accession to the World Trade Organization (WTO) are substantial but the United States can enjoy them only if it grants Russia permanent normal trade relations (PNTR) status—by repealing application to Russia of the Jackson-Vanik Amendment, which bars favorable trade relations with countries that restrict emigration. While congressional approval is not necessary for completion of Russian accession to the WTO, Congress needs to grant Russia PNTR to make it possible for US companies to take full advantage of the best available conditions of access to the Russian market for both trade and investment. Åslund and Hufbauer calculate that US exports to Russia could double over the next five years—from $9 billion in 2010 to$19 billion—adding jobs in the services, agriculture, manufacturing, and high-tech sectors. More generally, with Russia's accession to the WTO and the United States granting PNTR to Russia, US-Russia commercial relations will be set on a sounder and friendlier footing, facilitating cooperation on national security and political issues. By strengthening the rules-based global trading system, WTO accession and PNTR will discourage Russia from undertaking protectionist measures. President Barack Obama has stated that he looks forward to working with Congress "to end the application of the Jackson-Vanik amendment to Russia in order to ensure that American firms and American exporters will enjoy the same benefits of Russian WTO membership as their international competitors." It is imperative that Congress respond constructively in the same spirit of bipartisanship that led to the successful approval earlier this year of the Colombia, Korea, and Panama trade accords. Political wrangling, misjudgment, and miscalculations must not be allowed to cost the United States a significant new source of economic growth and cooperation in the future.