Abstract
Slovakia joined the euro area after a period of unprecedented real appreciation. The response to financial crisis combined internal devaluation with productivity increasing measures, including capital deepening in the banking sector. Although this strategy was successfully restoring an external equilibrium, the economy experienced a strong but short recession in 2009 which was driven by credit reductions. This development is compared with Estonia and Slovenia, two other small and very open economies, recently entering the euro area. The financial crisis reduced the financial integration gains in new euro member states in Central and Eastern Europe.
Highlights
The emerging economies in Central and Eastern European countries (CEECs) have been hit hard by the financial crisis
This paper describes how Slovakia navigated the crisis and how its economy returned to a strong, though jobless, growth
Exchange rate overvaluation The decade prior to the crisis were characterised by a rapid growth of GDP in Slovakia of around 6%, about three times the euro area average
Summary
The emerging economies in Central and Eastern European countries (CEECs) have been hit hard by the financial crisis. Excessive consumption growth was associated with a lending boom, and the credits were provided mainly by foreign banks, which invested massively in CEECs. During the financial crisis this development was negatively affected by several factors.
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