As governments across Western Europe began bailing out banks and their depositors, Eastern Europeans watched nervously, unsure about what the global financial storm would mean for them. Now that the storm has hit, the fragile bonds of European solidarity are being tested.
Two countries — Hungary and Ukraine — have already asked for large packages of support. Several more could do so over the next month if frozen credit markets do not thaw. If the situation continues until the end of the year, which cannot be ruled out, many more countries could experience serious banking crises.
Over the last two decades, Eastern Europe has undertaken wide-ranging reforms and embraced global financial integration. Foreign, mostly European, banks have entered these markets with unprecedented speed and force. These banks have increasingly reached out to more risky small and medium-sized enterprises and helped people buy their own houses and start new businesses. But successful financial development is now coming back to haunt these countries.
Until now, the countries of emerging Europe withstood the global financial squeeze remarkably well, coping with the slowdown in important export markets and increased borrowing costs. But no open economy can resist a complete shutdown of the lending markets. Perhaps they became too dependent on cheap credit, but they were not alone in this respect.
Some foreign banks are now withdrawing liquid funds from subsidiaries in emerging Europe. National Bank of Russia figures show that foreign banks withdrew more than US$10 billion in that country in September alone. Other central banks make similar claims. To be fair, Raiffeisen International has announced that it was supporting its Ukrainian subsidiary, Bank Aval, with an additional 180 million euros (US$224 million). Whether other parent banks active in the region stand by their subsidiaries depends on how severe the crisis in Western Europe becomes.
But the Western European bailout packages could make the situation in emerging Europe worse. While most parent banks in the region are likely to benefit from these measures, this does not necessarily translate into support for their foreign subsidiaries. In fact, there is a serious risk that these bailouts will come at the expense of Eastern Europe. Several governments have declared that taxpayer money cannot go into operations abroad.
Governments in emerging Europe should, of course, play their part in stabilizing their financial systems. But at this point there are severe limits to what they can do. Most do not have the financial clout to counter the extraordinary pressures from financial markets. An offer by Hungary’s government to extend a general guarantee of deposits or to ensure liquidity in interbank markets has limited credibility.
To survive this crisis, emerging Europe needs support from outside. First and foremost, West European leaders must ensure that the crisis is resolved at the core and many observers doubt that they have done enough. Second, they must prevent the crisis measures already taken from discriminating against subsidiaries in Central and Eastern Europe, independently of whether they are within or outside the EU. Third, they must combine forces, as in Hungary, with international financial institutions in supporting these economies.
Georgia’s experiences following its recent war with Russia offer a possible model. The IMF provided an emergency credit line to support the currency, the World Bank coordinated the relief effort (much of it financed by the US and the EU), and the European Bank for Reconstruction and Development used its knowledge and resources to lead the effort to save the financial system. The Georgia package is not a done deal and circumstances elsewhere are different, but it shows that standard instruments can go a long way.
Yet more resources and new instruments will be needed. The case of Hungary shows that the EU can tweak an existing instrument — balance-of-payments support — and use it creatively. For non-EU countries, like Turkey and Ukraine, innovative ideas are also urgently needed.
There should be no doubt about what is at stake. It is has been little noticed, but in the last few years, Eastern Europe, including Russia, surpassed the US and the UK as the euro zone’s most important export markets. Many of these markets now face slowdown or even negative growth. Moreover, Western European companies have invested on a previously unimaginable scale. There is a serious risk that, if the crisis becomes even worse, East European governments will see no alternative but to nationalize some institutions, particularly some of the foreign-controlled banks.
But, even more importantly, decades of financial development and broad economic reforms could unravel. As in Western Europe and the US, governments will again play a larger role in the economy, but state involvement has different connotations in these former socialist economies, particularly as they now face a backlash against financial development and against reformers.
As if this was not enough, Western governments and businesses should ponder what kind of offers may come from Russian sources, private or public, for distressed banks and companies. No doubt with strings attached.
Marek Belka, a former prime minister of Poland, was recently appointed director of the IMF’s European department. Erik Berglof is chief economist at the European Bank for Reconstruction and Development.
COPYRIGHT: PROJECT SYNDICATE
Taiwan’s semiconductor industry gives it a strategic advantage, but that advantage would be threatened as the US seeks to end Taiwan’s monopoly in the industry and as China grows more assertive, analysts said at a security dialogue last week. While the semiconductor industry is Taiwan’s “silicon shield,” its dominance has been seen by some in the US as “a monopoly,” South Korea’s Sungkyunkwan University academic Kwon Seok-joon said at an event held by the Center for Strategic and International Studies. In addition, Taiwan lacks sufficient energy sources and is vulnerable to natural disasters and geopolitical threats from China, he said.
After reading the article by Hideki Nagayama [English version on same page] published in the Liberty Times (sister newspaper of the Taipei Times) on Wednesday, I decided to write this article in hopes of ever so slightly easing my depression. In August, I visited the National Museum of Ethnology in Osaka, Japan, to attend a seminar. While there, I had the chance to look at the museum’s collections. I felt extreme annoyance at seeing that the museum had classified Taiwanese indigenous peoples as part of China’s ethnic minorities. I kept thinking about how I could make this known, but after returning
What value does the Chinese Nationalist Party (KMT) hold in Taiwan? One might say that it is to defend — or at the very least, maintain — truly “blue” qualities. To be truly “blue” — without impurities, rejecting any “red” influence — is to uphold the ideology consistent with that on which the Republic of China (ROC) was established. The KMT would likely not object to this notion. However, if the current generation of KMT political elites do not understand what it means to be “blue” — or even light blue — their knowledge and bravery are far too lacking
Taipei’s population is estimated to drop below 2.5 million by the end of this month — the only city among the nation’s six special municipalities that has more people moving out than moving in this year. A city that is classified as a special municipality can have three deputy mayors if it has a population of more than 2.5 million people, Article 55 of the Local Government Act (地方制度法) states. To counter the capital’s shrinking population, Taipei Mayor Chiang Wan-an (蔣萬安) held a cross-departmental population policy committee meeting on Wednesday last week to discuss possible solutions. According to Taipei City Government data, Taipei’s