LONDON – Europe’s emerging markets have this year experienced their worst output collapse since the great “transitional recession” that followed the end of communism. Five countries are expected to suffer double-digit declines in GDP. Non-performing loans in the banking sector and unemployment continue to rise in many countries.
There is no doubt that the European transition region is in deep crisis. But is the transition from communism to a market economy itself in crisis? How have the institutions and policy frameworks that were the outcome of the transition process coped? Will the crisis lead to a backlash against market-oriented reforms?
While Central and Eastern Europe has been the emerging-market region to suffer the most in the crisis, it has generally avoided the currency collapses, systemic banking failures, and spikes in inflation that were the staple of previous crises. Given how deeply integrated the region has become with the rest of the world, this is remarkable.
That deep integration cuts both ways. On the one hand, it created economic ties and financial dependence that have made many transition countries highly susceptible to the crisis in the West. On the other hand, it mitigated the large capital outflows that were a destructive force in past crises, contributed to more mature institutions and domestic policy responses, and helped mobilize vigorous international support.