Lifeguard 
of Europe’s economy

The global crisis as seen by an experienced economist: The reasons for the collapse of financial markets and what lies in store for the countries in our part of Europe.

The following interview forms an introduction to a paper to be delivered by Prof. Leszek Balcerowicz at the ‘Eurobuild CEE’ conference:

“Crisis or Correction”

Emil Górecki, ‘Eurobuild CEE’: Have we now had all the bad news about the world’s economy or are there still nasty surprises around the corner which could further exacerbate the economic situation?

Leszek Balcerowicz: The global economy is experiencing a period of unusual instability. The current prognoses, including those of the International Monetary Fund, do not envisage a sudden deterioration of the situation. The effects of the financial crisis will, obviously, be increasingly palpable for the rest of the economy in the form of recession, according to current forecasts, but what is not predicted is for the developed countries to experience an economic crash in the next few months. These forecasts also expect the economy to start getting back on its feet in 2010. But let me repeat – the situation is unusually unstable. 

How long will the countries of Central and Eastern Europe be able to cope with problems related to financial liquidity and the economic slowdown? Ukraine, Russia and Hungary are today in the group of the highest risk countries. Will the way in which they emerge from the crisis mean a much longer recession than in Poland, for instance?

Financial liquidity problems arise whenever a national loan has been largely financed by foreign capital and when the growth rate of such credit is large. The situation in Central and Eastern European countries varies widely. The credit boom had a particular impact in the Baltic countries, which is why the growth rate is slumping so dramatically there. In Russia the cause of the slowdown is the sharp fall in the price of crude oil as well as the huge external debt incurred by Russian companies. Ukraine is suffering from the plummeting prices of the metallurgical products it exports and also from a complicated situation with the national budget. That latter factor is also playing a part in Hungary, where an additional issue is the large contribution of foreign-currency denominated loans. When seen against the backdrop of these countries, the situation in Poland, the Czech Republic and Slovakia is more stable, although economic growth is clearly also slowing down.

Would you agree that the collapse of the world economy is due to the failure of the free market? How does an economic liberal accept such strong state interference in the economy?

The current crisis is not the result of clean forces acting on the market, since the market always acts within the framework of the activity of public institutions. And this activity was a major cause of the crisis. Among other factors – the interest rates of the FED (Federal Reserve System) had been too low since at least 2003, which encouraged the creation of huge indebtedness and which, in turn, fuelled the upsurge of house prices in the US. A number of US institutions, such as Fannie Mae and Freddie Mac which supported the mortgage loans market, additionally boosted the rate at which mortgage loans were granted. Thus it would be wrong to claim that the present crisis is proof of the failure of capitalism.

Economists and analysts, not to mention politicians, are announcing their forecasts for Poland’s 2009 GDP, which range from more than 4 pct down to even as little as 1 pct. What sort of figure are you expecting?

The scope of the forecasts reveals the scale of uncertainty. The Polish government would be wise to take the more pessimistic view into account when planning the 2009 budget.

What will your role be in the 
EU council’s preparations for financial supervision reform in the European Union? Will the measures taken allow similar situations to be prevented in the future?

I am one of the group’s eight members and the only one from the new member countries. The remaining experts come from France, Spain, Germany, Holland, Sweden, Britain and Italy. Our group’s task is to prepare, by next February, potential solutions for the European Union which would reduce the risk of such crises in the future.

Is the position of those European countries which have already accepted the euro better than those which have not yet introduced the currency? If Poland adopts the euro would it mean greater economic security?

A country in the euro zone avoids the sharp currency fluctuations that make economic activity more complicated. This was evident in the last few weeks. And that is also why Denmark, which experienced strong exchange rate fluctuations despite its stable economy, is now talking of entering the euro zone. ν