EUROPE AND CENTRAL ASIA The Europe and Central Asia (ECA) Region has been hit hard by the global financial and economic crisis. The very forces of globalization that led to major progress since 1990 have transmitted the effects of the crisis to the region through international capital, product, and labor markets. Somewhat paradoxically though, the most effective responses to the crisis are those that deepen economic integration. Looming human crisis - poverty and vulnerability rising Nearly 90 million of the Region’s 480 million people – almost 18 percent of the population – moved out of poverty and vulnerability since 1999. These gains are now at risk as a result of the financial crisis. About 30 percent of the people – about 145 million – are still considered either poor or vulnerable. But the number of poor and vulnerable people is now expected to rise throughout the Region, increasing by about 5 million people for every 1 percent decline in GDP. In 2009, the Region is projected to have an additional 13 million poor or vulnerable people, instead of the number falling from 145 to 130 million as expected before the crisis. “Emerging Europe and Central Asia was the region that was the hardest hit by the ongoing global economic crisis,” said Philippe Le Houerou, World Bank Vice President for the Europe and Central Asia Region. “Growth in the Region fell from 7.6 percent in 2007 to 4.7 percent in 2008, and the Region’s economies are expected to shrink by 5.6 percent in 2009. There are encouraging signs that the economies in the Region are stabilizing, but unemployment and poverty are increasing. For the region’s workers and their families, it will be a long and slow recovery.” Europe and Central Asia hit hard Though there is differentiation across the Europe and Central Asia region, many countries entered the crisis in a vulnerable position. Relatively high current account deficits, elevated external debt levels, rapid credit growth, and a consumption boom financed by foreign currency borrowing created vulnerabilities in many countries in Central and Eastern Europe (CEE), the Baltics, and the Commonwealth of Independent States (CIS). On the other hand, sharp drops in commodity prices brought growth for some countries in the eastern part of the Region – especially Russia and Kazakhstan – to an abrupt halt, which hit lower income economies hard through the slowing of exports and migrant remittances. For these reasons, ECA countries have been hit relatively early and with greater severity than other developing regions. In particular, the effects of the crisis are being felt through three key transmission mechanisms – financial, product, and labor markets. In the financial sector, rollover risks for countries with high current account deficits have created a highly uncertain environment. Before the crisis, there were differences within ECA in public sector deficits, but private sector savings gaps were large almost everywhere. This resulted in a growing current account deficit and big capital inflows, especially in Central Europe. This year, current account deficits in ECA will halve from -8.4 in 2008 to -4.6 percent of GDP in 2009, while fiscal deficit will triple from -1.5 to -4.8 percent of GDP. So while the private sector savings gaps will shrink, government dissaving will rise. Tightened budget constraints come at a time when government action may be most needed. Unemployment is on the rise with unprecedented job losses of as much as 1 percent a month in some countries and double-digit unemployment forecast for others in the near future. The high levels of unemployment in Russia and other destination countries for migrants is especially bad news for countries that are dependent on remittances, such as Tajikistan, Moldova, Albania, and Armenia. For instance, current simulations for Tajikistan suggest that an anticipated 30 percent decline in remittances could result in a 5 percentage point increase in the number of people living in poverty. In these and other countries, the financial crisis hit poor households at the worst time, after they had been weakened by the food and fuel crises. Responses to the crisis – maintain economic integration Much of the rapid growth that ECA countries experienced until the crisis resulted from their increasing integration into global financial, product, and labor markets. The best response to the crisis is to maintain this integration and look to increase resilience to external shocks through the implementation of solid financial, fiscal, and social policies. Le Houerou continued, “After enjoying a decade of strong growth and poverty reduction, the countries of Eastern Europe and Central Asia are now seeing the global economic and financial crisis push people back into poverty and unemployment. But they should not turn their back on the ‘growth through integration’ strategies that have helped them converge closer to the levels of living in advanced economies.” Fiscal policy options during the crisis are limited for most countries, yet keeping trade channels open is the most promising way for ECA countries to benefit from fiscal stimulus programs in Western Europe. Poland’s automakers have, for example, benefited from Germany’s special incentives for new car purchases. Similarly, the region will have to find ways to keep financial channels open through the crisis, at least to prevent a disorganized pullback of liquidity from the region. And migration earnings, while falling, have proved more resilient than export earnings. Keeping labor market channels open is necessary, but not sufficient. Social policy actions should be a priority. Most ECA countries spend a good amount on social assistance and social insurance and have at least one existing program that has the potential to serve as a mechanism to help the poorest segments deal with the effects of the economic crisis. Back to Top | 
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