IDEAS home Printed from https://ideas.repec.org/a/rau/journl/v5y2010i3p31-55.html
   My bibliography  Save this article

Economic Crisis In New Eu Member States In Central And Eastern Europe: Focusing On Baltic States

Author

Listed:
  • Yoji Koyama

    (Professor Emeritus at Niigata University)

Abstract

After giving a general view of the economic crisis in new EU member states in Central and Eastern Europe, this paper examines the causes, focusing on Baltic States, especially Latvia. Thanks to the Single Market of the EU, workers in this country became able to migrate to advanced EU countries, especially the UK, decreasing the unemployment rate and at the same time causing a sharp increase in wages due to a tightened labor market. Banks from Nordic countries, Sweden in particular, came to operate in Latvia and competed for market shares, stirring a consumption boom. In a situation in which people can easily get loans denominated in foreign currency, monetary policies of the central bank are of no use. The Latvian economy already showed a sign of overheating in 2005. However, in the spring of 2007, the government turned to restrictive policies, causing depression at the end of 2007. In addition, the Lehman shock dealt the Latvian economy its final blow. Baltic States have shared a common weakness in terms of their development relying heavily on foreign capitals. In the case of Estonia and Lithuania, however, the circumstances in which foreign- owned banks have been overwhelmingly dominating the banking sector benefited these countries. As parent banks of foreign-owned banks coped with difficulties, both countries were able to avoid the worst case scenario. Latvia, which is reconstructing its economy under support from the EU and the IMF, set up the introduction of the euro in 2013 as an exit strategy. Latvia is in dilemma: If the country does not devalue its national currency and tries to satisfy the Maastricht criteria (especially having a budget deficit of less than 3% of the GDP) soon, it will be obliged to adopt pro-cyclical policies, causing economic stagnation. There is a scenario in which the financial crisis in Latvia might cause disorder in the EU economy via the possible collapse of Swedish bank(s), but the likelihood that this will come to pass seems very small.

Suggested Citation

  • Yoji Koyama, 2010. "Economic Crisis In New Eu Member States In Central And Eastern Europe: Focusing On Baltic States," Romanian Economic Business Review, Romanian-American University, vol. 5(3), pages 31-55, September.
    • Handle: RePEc:rau:journl:v:5:y:2010:i:3:p:31-55
    as

    Download full text from publisher

    File URL: http://www.rebe.rau.ro/RePEc/rau/journl/FA10/REBE-FA10-A2.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gabor Hunya & Monika Schwarzhappel, 2008. "Decline to Follow Uneven FDI Inflow Growth," wiiw FDI Reports 2008-06, The Vienna Institute for International Economic Studies, wiiw.
    2. Roberto Frenkel & Martin Rapetti, 2009. "A developing country view of the current global crisis: what should not be forgotten and what should be done," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 33(4), pages 685-702, July.
    3. Jesmin Rahman, 2008. "Current Account Developments in New Member States of the European Union: Equilibrium, Excess, and EU-Phoria," IMF Working Papers 2008/092, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Novák, Zsuzsanna, 2014. "Monetáris politika, infláció és gazdasági növekedés Kelet-Közép- és Délkelet-Európában [Monetary policy, inflation and economic growth in Central and South Eastern Europe]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 923-942.
    2. Mező, Júlia & Bagi, Ágnes, 2012. "Crisis management in the Baltic States," MPRA Paper 40366, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yuko Kinoshita, 2011. "Sectoral Composition of Foreign Direct Investment and External Vulnerability in Eastern Europe," IMF Working Papers 2011/123, International Monetary Fund.
    2. Jan Hanousek & Evžen Kočenda, 2011. "Public Investment and Fiscal Performance in the New EU Member States," Fiscal Studies, Institute for Fiscal Studies, vol. 32(1), pages 43-71, March.
    3. Sergio Cesaratto, 2012. "Controversial and novel features of the Eurozone crisis as a balance of payment crisis," Department of Economics University of Siena 640, Department of Economics, University of Siena.
    4. International Monetary Fund, 2009. "Former Yugoslav Republic of Macedonia: Selected Issues," IMF Staff Country Reports 2009/061, International Monetary Fund.
    5. Michele Ca’ Zorzi & Alexander Chudik & Alistair Dieppe, 2012. "And then current accounts (over)adjusted," Empirical Economics, Springer, vol. 43(1), pages 245-270, August.
    6. Kohler, Karsten, 2019. "Exchange rate dynamics, balance sheet effects, and capital flows. A Minskyan model of emerging market boom-bust cycles," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 270-283.
    7. Frenkel, Roberto & Rapetti, Martín, 2012. "Exchange rate regimes in the major Latin American countries since the 1950s: lessons from history," Revista de Historia Económica / Journal of Iberian and Latin American Economic History, Cambridge University Press, vol. 30(1), pages 157-188, January.
    8. Alberto Botta & Giuliano Toshiro Yajima & Gabriel Porcile, 2023. "Structural change, productive development, and capital flows: does financial “bonanza” cause premature deindustrialization?," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 32(2), pages 433-473.
    9. ULGEN, Faruk, 2010. "Crise systémique et régulation financière [Systemic crisis and financial regulation]," MPRA Paper 35466, University Library of Munich, Germany.
    10. Dumitru, Ionut, 2008. "O evaluare a sustenabilitatii deficitului de cont curent in Romania [An assessment of the current account sustainability in Romania]," MPRA Paper 18614, University Library of Munich, Germany.
    11. Harkmann, Kersti & Staehr, Karsten, 2021. "Current account drivers and exchange rate regimes in Central and Eastern Europe," Journal of International Money and Finance, Elsevier, vol. 110(C).
    12. Michele Ca' Zorzi & Alexander Chudik & Alistair Dieppe, 2012. "The perils of aggregating foreign variables in panel data models," Globalization Institute Working Papers 111, Federal Reserve Bank of Dallas.
    13. Ca’ Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2012. "Thousands of models, one story: Current account imbalances in the global economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1319-1338.
    14. Brankica Pažun & Zlatko Langović & Ana Langovic Milićević, 2016. "Equilibrium Real Exchange Rate Assessment of the Serbian Dinar: The MB approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 76-87, March.
    15. Alberto Bagnai, 2014. "Un external compact per rilanciare l'Europa," a/ Working Papers Series 1401, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
    16. Anastasia Blouchoutzi & Christos Nikas, 2010. "The macroeconomic implications of emigrants' remittances in Romania, Bulgaria and Albania," Post-Communist Economies, Taylor & Francis Journals, vol. 22(4), pages 547-558.
    17. Kersti Harkmann & Karsten Staehr, 2019. "Current account dynamics and exchange rate regimes in Central and Eastern Europe," Bank of Estonia Working Papers wp2018-08, Bank of Estonia, revised 23 Jan 2019.
    18. Zoran Grubišiæ & Sandra Kamenkoviæ & Aleksandar Zdravkoviæ, 2018. "Impact of government balance and exchange rate regime on current account during the economic cycle: evidence from CEE countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 36(1), pages 309-336.
    19. Comunale, Mariarosaria, 2018. "Current account and real effective exchange rate misalignments in Central Eastern EU countries: An update using the macroeconomic balance approach," Economic Systems, Elsevier, vol. 42(3), pages 414-436.
    20. Moral-Benito, Enrique & Roehn, Oliver, 2016. "The impact of financial regulation on current account balances," European Economic Review, Elsevier, vol. 81(C), pages 148-166.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rau:journl:v:5:y:2010:i:3:p:31-55. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alex Tabusca (email available below). General contact details of provider: https://edirc.repec.org/data/ferauro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.