Economic turmoil: the impact of the crisis on the new EU Member States

2 December 2009

Marek Belka, Director of the European Department of the IMF and former Prime Minister of Poland, said reliance on links with Western European countries meant new Member States were worst hit by the economic crisis.

The IMG and European Commission put together a finance programme to support Hungary, Latvia and Romania, “in a matter of weeks”, and encouraged foreign banks to continue doing business, averting capital flight.

The financial assistance ‘conditionalities’ concentrated on correcting the basic macroeconomic conditions and offering social protection. New Member States must now reinvent their business models and adjust regulatory and supervisory frameworks.

Ingrida Simonytė, Lithuanian Minister of Finance, said as the government had run a deficit before the crisis, in autumn 2008 when the Lithuanian economy unravelled there were no accumulated fiscal reserves or windfall revenues. Early 2009 saw “one of the biggest GDP declines in the world”, but there is now 6% growth.

The Lithuanian Government made huge consolidations, which in the year 2009 to 2010 amounted to 12% of GDP). These moves were recognised by the IMF and the European Commission. The government plans to reduce its fiscal deficit to the 3% Maastricht criteria in 2011.

Almos Kovács, State Secretary of the Hungarian Ministry of Finance and Member of the Economic and Financial Committee of Hungary, said his country’s economic crisis mainly resulted from its dependence on external trade, so when import demand declined, GDP plummeted.

Since 2003, Hungary has had run a high external debt, and managed to finance this, but as the crisis began to bite, access to foreign loans became more difficult and investors dropped out of the market.

New reforms, with incentives to stay in work longer, will increase employment levels; some subsidies had been cut, and spending is more efficient.

Elena Flores, Director of “Economies of new Member States II” in DG Economic and Financial Affairs, European Commission, attributed the differential impact of the crisis between Member States to the wide differences in national economic structures and policies, and she questioned whether some new Member States had made sufficient reforms.

She said an economy using capital movements as the driver of growth must be properly managed, with an improved financial regulation and supervision, plus an enhanced framework for macroeconomic surveillance”. European institutions should supervise balance of payments, give targeted advice and provide strong incentives.