Capital inflows, Current Accounts, and Exchange Rate Regimes in Central East Europe during and after the Global Financial Crisis

Abstract

Summary This contribution is concerned with the real economy effects of the current global crisis in Central East Europe. It analyses the way that the global financial crisis has transmitted into Central East Europe (contagion) by focussing on the drying up of capital inflows (in particular foreign direct investment), the worsening of current account imbalances, the role of the exchange rate regimes, and of increasing foreign currency borrowing during the years before the crisis. The analysis shows that the growth and development model of the region, which featured current account deficits financed by capital inflows, served as an accelerator for the adverse effects of contagion in Central East Europe. Countries with a fixed exchange rate to the euro proved to be the countries in the region hit hardest, whereas a flexible exchange rate appears to have acted as a shield against contagion. This casts doubts on the preferability of the planned rapid adoption of the euro in some of the countries in Central East Europe.