Developments in the economies of member states outside the Euro area

The rapid deterioration in international financial markets during autumn 2008 reinforced and accelerated the slowdown and uncertainty that was already marring prospects for many of the world’s economies. In the US, bankruptcies, bail-outs of mainstream financial institutions and broader initiatives to support the financial system and the economy as a whole tell their own story about the scale of the problems (see also Quaglia et al., in this volume). Such events were not confined to the US and quickly spread to Europe and beyond.
The banking system in Iceland collapsed. Several EU countries, including the UK, France, Germany, Belgium, Ireland and Luxembourg took measures to support troubled financial institutions and/or to give their economies a fiscal boost. The crisis also led Hungary and Latvia to approach the EU, the IMF and World Bank for financial assistance in 2008. As a consequence, global economic growth fell from the 5 per cent average prevailing in 2004–07 to 3.3 per cent in 2008 and is forecast to slow to 0.5 per cent in 2009 (Commission, 2008, 2009). By the end of 2008, there were signs that the economic downturn was precipitating a collapse in world trade. Although world trade growth was 2 per cent in 2008, it slowed dramatically during the second half of the year and is forecast by theWorld Trade Organization (WTO) to fall 9 per cent in volume terms in 2009 (WTO, 2009). Some recovery is anticipated for 2010, an expectation fuelled by confidence,which may be misplaced, that the macroeconomic measures undertaken by JCMS 2009 Volume 47 Annual Review pp. 259–276 national governments will be sufficient to mitigate the worst effects of the problems within the global financial system.The US economy faced severe problems in 2008: unemployment rose, investment was scaled back; banks sought to restore their balance sheets and major industries like motor manufacturing teetered on the brink of collapse. This pattern was mirrored in Japan. Many emerging economies seemed initially resilient to these pressures but the severity of the downturn within the US also led these economies to downgrade their growth expectations substantially. Indeed China followed western economies and announced a substantial fiscal stimulus to mitigate the effects of the global downturn on domestic demand. Elsewhere in Asia, growth held up but this is expected to be temporary. Overall, 2009 is expected to be a year of economic stagnation around the world with the slowing growth rate of 2008 turning into outright recession in 2009. This article addresses the issue of how those EU economies outside the euro area fared in the early stages of the international economic and financial crisis. Their 2008 experiences were wide-ranging: the Baltic states demonstrated the most dramatic turnaround in economic fortunes whereas the Balkan states continued to grow. In the latter case, these countries are not unaffected by the crisis but the timing of its impact has varied.