International and Domestic Policy Responses to the Financial Crisis in Central and Eastern Europe: Lessons for Ukraine

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Introduction

The ongoing financial and economic crisis raised a number of new questions and challenges to be addressed by academics and state officials both on the global and national levels. What are the primary causes of the crisis? What lessons should be learnt? How to adjust the global financial system and prevent such negative consequences in future? Those questions became subject for political discussions at the highest levels, such as the G20 Summits and the World Economic Fora in Davos.

The global crisis has many particular traits. One of them is the unequal distribution of the crisis impact across world regions. Central and Eastern Europe (CEE) is believed to be among the regions most severely hit by the crisis. According to the IMF assessments the overall GDP decline in the region in 2009 was around 8,4%. At the same time the region is anticipated to recover quite soon. The IMF forecasts the region to have a positive output starting already in mid 2010 and reaching 4,0% GDP growth in 2012 (2).

Meanwhile, individual countries in the region were also unevenly hit by the crisis. Estonia, Latvia, Lithuania were the most harshly damaged, registering a GDP decline in 2009 of -4,0%, -18,0%, and respectively -18,5%. At the same time, the Czech Republic (-4,3%), Slovakia (-4,6%) and Slovenia (-4,7%) suffered the least, withe the Polish economy experiencing a 0,97% growth in 2009 (3). The explanations for these differences in crisis impact across countries vary. Diverse macroeconomic and financial vulnerabilities, as well as national policy responses to the crisis are among them.

Central and Eastern European countries in times of the crisis became subject to a number of academic and policy studies and debates. Authors focused on the main causes of the crisis (Anders Aslund (4)), lessons to be learnt (Agnes Benassy-Quere, Benoit Coeure, Pierre Jacquet, Jean Pisani-Ferry (5)), or the role of the EU in dealing with the crisis (Zsolt Darvas, Bela Galgoczi (6)). Ukrainian authors are mostly focused on theoretical approaches to explain root causes of the crisis, its global imperatives and impact on the Ukrainian economy (Umantsiv Y., Shevchenko V Shelud'ko N, Shklyar (7)) . This paper comes to complete the existing literature in the field by analyzing the main successes and failures in policy responses to the crisis in Central and Eastern Europe on the global, regional and domestic levels, and thus revealing relevant lessons for Ukraine. The paper argues that despite the failure to prevent the crisis at all levels, coordination of actions at global and EU levels and high discipline of the CEE countries in national policy supported their efforts to manage the crisis efficiently. First of all, the paper presents key data on the extent to which CEE countries were affected by the crisis. Second, it introduces the main findings on successes and failures in policy responses to the financial crisis in CEE countries on global, EU and domestic levels. It finally reveals key obstacles to successful resolution of the crisis in Ukraine and draws recommendations for Ukraine.

CEE countries in crisis: heavy damages but fast recovery

Central and Eastern Europe was among the regions that were the most severely hit by the financial crisis. In 2009 the regional GDP declined by 8,4%, which was the lowest among all emerging and developing regions (Figure 1.) (8) This was to a large extent influenced by the growth in trade and financial links of the region with the rest of the world and especially with the EU after accession of the twelve new member states in 2004 and 2007. As the Director of the IMF's European Department Marek Belka said "because Europe is very open in terms of trade, and because its financial sector is so closely integrated with the rest of the world, the region cannot avoid being significantly impacted by the financial crisis" (9).

Indeed, market reforms in times of transition, liberalization of trade and financial markets and fast-growing economies of the region spurred international trade, attracted new investments and foreign capital. …