Europe sov­er­eign debt cri­sis shows no coun­try can re­main iso­lated

The Pak Banker - - Front Page -

BEL­GRADE

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.

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