Understanding the Crisis in Emerging Europe

Emerging Europe experienced larger output declines during the 2008-09 crisis than any other region in the world. However, some countries suffered much smaller declines than others; major balance-of-payments crises and banking collapses were avoided; and economic policy reactions stayed well clear of populist and confiscatory measures experienced in previous crises. The paper argues that this can be attributed to European economic and political integration. It shows that foreign bank ownership was a mitigating factor in the output decline, and that more than half of the cross-country variation in output decline can be explained by a small group of macroeconomic vulnerabilities.