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Policy Brief 11-9

Lessons from the East European Financial Crisis, 2008-10

by Anders Aslund, Peterson Institute for International Economics

June 2011

In the fall of 2008, Central and Eastern Europe became a flashpoint in the global financial crisis. The positive surprise, however, is that after about two years, the crisis in the region had more or less abated. Public attention moved from Latvia, Estonia, and Lithuania to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The issue was no longer why Latvia must devalue but what Greece could learn from Latvia. What lessons can be drawn from the resolution of the financial crisis in Eastern Europe for the rest of the European Union and the world at large?

Crisis resolution in these countries was decisive and successful, and the entire region save Romania had returned to economic growth by the second half of 2010. The financial crisis in Eastern Europe has been remarkable for everything that did not happen. There was no significant reaction against globalization, capitalism, the European Union, or the euro. No major strikes or social unrest erupted, while the population rose against populism and unjustified state privileges. Politically and financially, crony businessmen were the biggest losers, whereas the political winners were the moderate but resolute center-right forces. The sensible public wanted decisive action from their leaders to resolve their problems. The ideological wind was clearly liberal and free market but also socially responsible, favoring a somewhat purer market economy and a moderate retrenchment of the social welfare state. It has proven politically possible to cut public expenditures, salaries, and employment, as well as rationalize health care and education.

In the end, this crisis will likely benefit both Eastern and Western Europe and thus the European Union. Western Europe will have to learn from Eastern Europe, erasing the current division between first- and second-class members within the European Union. Thanks to the East Europeans, the West Europeans have slashed their corporate profit tax rates and have also been enticed to liberalize their labor markets. Now, they will also learn fiscal policy from the east.

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Policy Brief 11-9

Lessons from the East European Financial Crisis, 2008-10