Europe sovereign debt crisis shows no country can remain isolated
Ms Jorgovanka Tabakovi?, Governor of the National Bank of Serbia addressing at the conference "Financial system and economy - responses to the challenges of the crisis" said the on-going sovereign debt crisis in the euro area, most acute in Central and Eastern Europe has shown that no country can remain an isolated island in a global environment of strong economic and financial ties.
The adverse effects of the sovereign debt crisis in euro area countries spilled over to the region of Central and Eastern Europe, mainly via dampened external demand, the consequent weakening of economic activity and smaller inflow of foreign direct investments.
This went hand in hand with limited access to foreign sources of funding, as country risk premiums and costs of borrowing went up. In an environment of shrinking foreign capital inflows and exportsgenerated inflow of foreign exchange, the first line of defence against the crisis is the maintenance and improvement of competitiveness. The price aspect of competitiveness can be improved via exchange rate or by restrictive income policy.
The managed floating exchange rate regime significantly buffered the external shock which
Serbia experienced in the last quarter of 2008, when the first wave of the global financial crisis spilled over to our country. In 2009, compared to other countries in Central and Eastern Europe, Serbia's GDP shrunk the least (3.5%). At the same time, countries running the fixed exchange rate regime suffered greater economic turbulences. For example, the Baltic countries Estonia and Lithuania had to resort to adjustments through wage reductions, ending the year with a 15% fall in GDP.
As for Serbia, the flexible exchange rate regime also paved the way out of the crisis. On the one hand, the adjustment did not have to take place through sudden and drastic wage reductions and on the other, net exports gave a positive contribution to GDP growth. In this way, the dinar exchange rate was also the "engine" of Serbia's subsequent recovery, which will facilitate our shift to a new, sustainable model of investment- and exports-driven economic growth.
It is true that apart from numerous positive effects, the depreciation may also have a negative bearing on financial stability, especially in countries with a substantial share of external and domestic debt in foreign currency or foreigncurrency indexed, and in highly euroised economies such as Serbia.