ABSTRACT
The subprime crisis created the world’s worst recession since the Great Depression of 1929. The excessive leverage of financial institutions, the revaluation of toxic (securitised) assets and the collapse in world trade meant that the financial crisis spread widely following the freeze in interbank and international financial markets. The impact of the crisis in the Western European Economies (WEE) saw a decrease in their average growth rate from 2.9% in 2007, to 0.7% in 2008 and a negative growth rate of –4.3% in 2009. The impact was severe on the Eastern European (transition) Economies (EEE) with all except Poland recording negative GDP growth rates in 2009, the largest falls recorded for Estonia (–14.1%), Latvia (–17.7%), and Lithuania (–14.8%). 1 Poland continued to record positive GDP growth due to the development of its small and medium enterprise (SME) sector, strong domestic consumption, low export-to-GDP ratio, sustained level of foreign direct investment (FDI), and low level of domestic lending. The rest of the EEE followed a growth strategy that largely depended on inflows of FDI, cross-border lending and an export orientation that generated an annual average rate of GDP growth post-accession (and before the crisis) of 6.4%. This is very similar to the growth rates in the South East Asian (SEA) transition economies before their financial crisis of 1997 when their annual average rate of real GDP growth was 6%. In contrast, the WEE only grew 2.7% over the same period, with the differential between East and West, an indication of the rapid convergence process. Table 7.1 shows the growth of GDP (and the current account balance) in 1995 (when “normal” economic conditions resumed), 2000 and 2004 with accession to the European Union (EU), and subsequent years including the crisis.
