## Crisis Lessons to Remember for Europe’s Policymakers

_IMF Blog, February 24, 2010_

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## Bibliographic details
- Authors: Marek Belka
- Published: February 24, 2010

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### Overview and context
- Author: Marek Belka.
- Date: February 24, 2010.
- Focus: Lessons from the global economic crisis for Europe’s policymakers, with primary focus on countries outside the eurozone and reflections from the author’s experience as a former policymaker.

### Transition and European integration: key findings
- The transition from central planning to market-based economies remains an undisputed success.
- Market-based economy is described as “the only game in town.”
- Social cohesion in emerging market economies is assessed as robust; “for now at least, there is no serious social unrest in sight.”
- European integration helped eastern European countries by strengthening institutions and granting access to the EU single market.
- Structural funds and the EU balance of payments facility provided support during the global economic crisis.
- The EU “halo” that previously shielded emerging markets in borrowing costs is now gone; domestic policy choices matter more.

### Core crisis lessons for policymakers
- Good policies and strong institutions matter:
  - Countries with unsustainable fiscal policies and weak institutions were the first to fall and had less space for fiscal stimulus.
  - Policy quality must extend beyond fiscal and monetary responses to bank regulation, supervision, and public institution quality.
  - Examples:
    - Estonia kept its budget deficit under 3 percent of GDP during extreme economic decline due to strong institutions and political determination.
    - Romania’s independent and well-managed central bank helped the country survive a potential liquidity crisis during the recent presidential campaign.
- Good fiscal policies must be built in good times:
  - If prosperity is used for consumption rather than saving, fiscal stimulus or automatic stabilizers may not be feasible during downturns.
  - Fiscal stabilizers have regained favor; some eastern European countries (notably the Czech Republic and Poland) were able to afford fiscal stimulus.
- Watch expenditures:
  - Budgets that look strong in boom times can be exposed in busts due to falling tax revenues.
  - Policy trade-offs exist between low-tax models and the ability to provide extensive social services.

### Financial sector and capital flows
- Capital inflows: supportive if they increase output potential; risky if they merely stimulate demand.
  - Prudential regulations may be necessary to curtail unwanted capital flows; capital controls should not be ruled out in certain situations.
- Foreign ownership of banks:
  - Selling domestic banks to foreigners accelerated the creation of modern and efficient financial sectors.
  - Foreign-owned banks generally had long-term investment horizons and showed willingness to maintain exposure during the crisis.
- Domestic banks and competition:
  - Market opening and competitive pressure helped strengthen domestically-owned banks (examples: Poland’s PKO BP and Russia’s Sberbank weathered the crisis well).
  - Some domestically-owned banks faced trouble (examples: Parex in Latvia and OTP in Hungary), where country risk contributed to difficulties.
  - Critical determinant: whether banks have a sustainable business model not dependent on short-term wholesale funding.

### State responsibility, private-sector limits, and pragmatism
- Self-regulation of the private sector has limits; ultimate responsibility rests with the state.
- Bailouts became politically acceptable to avoid social unrest and preserve stability; this implies taxpayers may bear the cost if things go badly.
- Policymaking in emerging economies must be pragmatic and increasingly sophisticated as economies advance.
- The author notes a sense of betrayal among eastern policymakers at the abandonment of market-discipline rules in the West but stresses the need for refined policy messages tailored to emerging economies.

### Role of the IMF
- The IMF is portrayed as responsive and adaptive: “The Fund has listened, learned, and adapted.”
- The IMF is characterized as a doctor rather than a bad cop; engagement with the IMF may be uncomfortable but necessary when deeper problems exist.
- The Fund has improved its understanding of member countries’ diverse needs.

*Marek Belka, February 24, 2010 — Crisis Lessons to Remember for Europe’s Policymakers*

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## References

- [iMFdirect](http://blogs.imf.org/)
- [After the Crisis, Much Still at Stake for Eurozone](http://blogs.imf.org/2010/01/21/eurozone/)
- [EU “halo”](http://www.imf.org/external/pubs/ft/fandd/2009/06/cihak.htm)
- [Capital controls, at least in certain situations, should not be ruled out](http://blogs.imf.org/2010/02/19/emerging-europe-managing-large-capital-flows/)

_Source: https://www.imf.org/en/blogs/articles/2010/02/24/crisis-lessons-to-remember-for-europes-policymakers_