Financial Instability and Economic Growth in Transition Economies

The paper focuses on the fiscal and financial position of European post-socialist countries prior to the Global Financial Crisis (GFC) of 2007–2009 and afterwards. It highlights the impact of the transmission of crisis and the changes that have been ensued in terms of the pattern of economic growth. For this reason, it reviews the relation of higher GDP growth rates and the deepening of financial development, a model that had been adopted by the majority of countries until the outbreak of the crisis. More precisely, emphasis shall be given to Bulgaria, Romania, and the Baltic States due to the fact that these countries had experienced the most intense effects. Furthermore, we incorporate Minsky’s financial theory in order to identify the resemblances of the theory with their domestic financial systems and to reveal the weaknesses and vulnerabilities of their fiscal and financial stance. The scope is to indicate that the pursuit of a rapid accelerating GDP growth rates based solely on the financialisation of the economy does not constitute a panacea policy for total economy. Thus, we display relative macroeconomic data in relation with growth GDP rates ex ante and ex post the crisis. Hence, we address the issue that the advent of Global Financial Crisis has induced the countries under examination to moderate their economic policy of credit expansion and high indebtedness towards more balanced and steady growth pattern at the expense though of lower annual GDP rates.