As the international economic crisis continues to unfold, spreading from financial markets into the real economy, the EU10 economies find themselves especially hard hit.
External demand has collapsed, driven by recession in the region’s main trading partners.
Prospects for global recovery, for private capital flows, and for growth in the EU10 continue to deteriorate.
Forecasts are subject to very high degrees of uncertainty, mostly on the downside.
The EU10’s heightened vulnerability to this crisis is a by-product of the region’s great success at integrating with the EU and globally.
That integration has brought major benefits, including rapid convergence in incomes, improvements in living standards, and a sharp decline in poverty rates.
Recent data suggest that external accounts may have deteriorated further in the fourth quarter of 2008.
Furthermore, on the back of weakening investor sentiment, the financing of external positions has proved more difficult for emerging markets in recent months, including for the EU10 where, in many cases, central banks have had to reach into their reserves.
EU10 policymakers’ options are limited.
Monetary easing is constrained in a number of countries, and almost all of these countries have little to no room for fiscal stimulus because of financing and budgetary constraints.
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