Wednesday, January 14, 2009

IMF European Leader Hopes Crisis Is A "Wake Up Call" For Emerging Europe

Sources: IMF Survey, IMF Helping Counter Crisis Fallout in Emerging Europe; Reuters, Emerging Europe Facing Significant Slowdown

In October 2008, the IMF predicted that the credit crisis would start "hitting" emerging European markets. While emerging European economies had not been significantly exposed to the U.S. subprime mortgage market, the IMF argued that the fact that Western European banks were exposed to U.S. toxic assets was enough to indirectly affect emerging Europe. Prior to the outbreak of the crisis, emerging Europe had been experiencing a period of economic expansion.

Last week, Marek Belka, the head of the IMF's European Department, spoke about how the IMF is planning to advise emerging European economies in the coming year. The IMF has already spent more than $39 billion in emergency loans to the region, reaching out to countries like Hungary, Ukraine, Belarus, and Latvia.

According to Belka, emerging Europe should focus both on responding to the current crisis and on reforming its economic institutions so that it is better equipped to respond to future crises. In his view, the current crisis has served as a sort of "wake up call" for the region, one he hopes will lead to more cooperation amongst emerging European governments in the area of economic policy formulation.

Belka expressed a desire to coordinate with the European Union (EU), the World Bank, and the European Bank for Reconstruction and Development to help emerging European economies. He also stated that the IMF would be willing to provide external financial assistance to emerging European countries. He was optimistic about the IMF’s use of external assistance in Hungary and Latvia, and expressed hopes that it would be successful in other countries.

As for concerns that the current crisis will permanently hinder growth in emerging Europe, Belka argues that emerging European countries have been resilient in the reforms they have made thus far and will probably continue on that path in the future. Belka even raised the possibility that emerging European markets may respond better and faster than other, more established, European markets.

With regards to major policy goals for 2009 in emerging Europe, Belka stated that at the moment he is concentrated on helping the region respond to the changes that have and will be made to its economic and political structures to respond to the crisis. Among these changes are increased public debt and increasing government involvement in the public sector.

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