The Global Financial Crisis and its Impact on Emerging Market Economies in Europe and the CIS: Evidence from Mid-2010

Emerging market economies were major beneficiaries of the economic boom before 2007. More recently, they have become victims of the global financial crisis. Their future development depends, to a large extent, on global economic prospects. Today the global economy and the European economy are much more integrated and interdependent than they were ten or twenty years ago. Every country must recognize its limited economic sovereignty and must be prepared to deal with the consequences of global acroeconomic fluctuations. The statistical data for 2009 provides a mixed picture with respect to the impact of the crisis on various groups of countries and individual economies. On average, Central and Eastern Europe experienced a smaller output decline than the Euro area and the entire EU while the CIS, especially its European part, contracted more dramatically. However, there was a deep differentiation within each country group. Looking globally, richer countries, which are more open to trade and in which the banking sector plays a larger role and which rely more on external financing, suffered more than less sophisticated economies, which are less dependent on trade and credit (especially from external sources). With some exceptions, the previous good growth performance helped rather than handicapped countries in the CEE and CIS regions in the crisis year of 2009. The post-crisis recovery has been rather modest and incomplete. It remains vulnerable to new shocks (like the Greek Fiscal crisis), the danger of sovereign default and other uncertainties. Full post-crisis recovery and increasing potential growth will require far going economic and institutional reforms on both national, regional (e.g., EU) and global levels

The Euro as a Proxy for the Classical Gold Standard? Government Debt Financing and Political Commitment in Historical Perspective

[Introduction] In spite of the recent troubles in the euro area, Jesus Huerta de Soto (2012), a famous proponent of the gold standard, argues that the euro should be considered a 'second best to the gold standard' and is worth being preserved. From a classical liberal point of view, he sheds some light on the euro's similarities with the gold standard and on some important advantages of the currency union over its alternative, flexible exchange rates in Europe. According to Huerta de Soto (2012), the main advantage of the introduction of the common currency is that - like when 'going on gold' - European governments have given up monetary nationalism. Like the gold standard, the euro limits state power as it prevents national central banks from manipulating exchange rates and inflating away government debt. Currently, he argues, the common currency - like previously the gold standard - forces important reforms and/or spending cuts upon the countries of the euro area that face severe debt and structural problems. In this respect, the euro should be seen as 'a proxy for the gold standard'. In this policy paper, I attempt to address some similarities and differences in the institutional framework of the classical gold standard (1880 - 1912) and the European Monetary Union (EMU) (1999 - ) that affect government debt financing and the way in which countries react to crisis. I argue that - in line with Huerta de Soto (2012) - giving up monetary nationalism and committing to the rules of either the gold standard or EMU initially restricted the scope of state action. Therefore, the euro - like previously the gold standard - provided some (fiscal) policy credibility. Fiscal policy credibility was the main determinant of capital market integration and low government borrowing costs in Europe under both systems. But in contrast to Huerta de Soto (2012), I shall emphasize that neither the gold standard, nor the euro itself force reforms and spending cuts upon countries that face crisis and debt problems. The political commitment to the monetary systems determines the willingness to reform or cut spending and therewith fiscal policy credibility in crisis periods: (...

The Global Financial Crisis: Lessons for European Integration

The purpose of this paper is to analyze the various challenges facing European integration and the EU institutional architecture as result of the global financial crisis. The European integration process is not yet complete, both in terms of its content and geographical coverage. It can be viewed as a kind of intermediate hybrid between an international organization and a federation, subject to further evolution. This is also true of the Single European Market and the Economic and Monetary Union, which form the core of the EU economic architecture. Certain policy prerogatives (such as external trade, competition, and the Common Agriculture Policy) are delegated to the supranational level while others (such as financial supervision or fiscal policy) remain largely in the hands of national authorities. The EU's limited fiscal capacity has proven to be the most critical constraint in being able to respond to the crisis in a proper and well coordinated manner at the Union level. The EU budget is limited to 1% of its GDP and finances only specific policies. The EU cannot borrow or provide credit guarantees. There are several obstacles to coordinating national fiscal policies, which are both of an economic and institutional-political character. So the possibility of implementing a joint fiscal intervention, even for such emergency tasks as rescuing the pan-European financial institutions or member countries in distress, is very limited. These limitations have often led to the nationalization of the fiscal response, including offering emergency rescue packages to troubled financial institutions or non-financial corporations which. This, in turn, has often led to economic nationalism,” which undermines the basic principles of the Single European Market. The distressed financial markets also test the macroeconomic coherence of the EU and EMU, placing pressure on those countries which are considered financially fragile or potentially insolvent. They face surging risk premia, capital outflow, depreciating currencies, and sovereign borrowing constraints. Again, the EU does not have enough fiscal resources to provide rescue packages, and an increasing number of member-states must apply for IMF assistance. The best solution would be to increase, at least temporarily, the EU fiscal potential. This would allow providing rescue packages to both troubled financial institutions and member states in a coordinated way. In addition, the EU must act to complete the lacking elements of the Single European market architecture (such as European financial supervision) and help in strengthening global policy and regulatory coordination