Author: Gikas Hardouvelis
Publication: BANK OF GREECE, Economic Research Department – Special Studies Division, Special Conference Paper, February 2011
Two and a half years have passed since the beginning of the financial crisis in July 2007 but the economic crisis it caused is still with us. Regulators counteracted the crisis with drastic monetary and fiscal expansion and are currently designing a stricter and more stable future financial system that would ensure less wild economic fluctuations and, hopefully, no repetition of the adverse events we are living through today. Over the next decade, as economic and political power shifts to the developing world, global growth will slow down due to higher real interest rates, public and private deleveraging and a natural decline in global imbalances. The SEE region imported the crisis at the end of 2008 through a sudden shrinkage of capital inflows and a concomitant collapse of export markets, which caused significant output losses and immense pressure in local asset and currency markets. The region was found to be overheating with rising current account deficits, inflation and huge credit growth, partly financed by foreign inflows. Yet, the SEE financial system proved stable and well capitalized and domestic regulators acted swiftly to avert a total collapse of output. While the recession is coming to an end, it is difficult to see a rapid future expansion without a simultaneous departure from the old demand-driven model of growth. There is a crying need in SEE for a more balanced growth model and an emphasis on improving the domestic savings rate, shifting demand from consumption to investment, focusing more on export markets and fostering domestic competitiveness and total factor productivity via the rule of law, the quality of institutions, domestic infrastructure, as well as the matching of human capital development and job training with the modern needs of an increasingly globalized world economy. The current crisis can be turned into an opportunity for change.
JEL classification: G01, O52, F3
Keywords: SEE, economies, financial and economics crisis, financial system