speeches

Welcoming remarks at the EBRD Economic Policy Forum, London, 14 May 2009

EBRD President Thomas Mirow

Dear guests,

Thank you very much for accepting our invitation to join us for a day of debate about the financial and economic crisis in our region and ways out of it. We appreciate your participation and look forward to your thoughts on what is arguably the burning issue of our times. We are honoured by the presence of such a highly distinguished group of panellists and participants.

You have set yourself an ambitious agenda for today. Your ideas will inspire and help us to understand the challenges ahead. Allow me to make just a few remarks at the beginning of your conference.

The EBRD region is facing an almost unprecedented challenge. After many years of seemingly spectacular success when the only way seemed to be up, we have witnessed an equally spectacular slump which now seems to suggest that the only way is down. I believe that both perceptions have been exaggerated.

Recent, highly negative perceptions of eastern Europe ignore the fact that the crisis there is as noteworthy for what has happened as for what has not happened since the last quarter of 2008. Let me list a few examples:

• We did not see the uncontrolled collapse of any systemic bank in the region.
• We did not see the withdrawal of any of the leading western banking groups who own most of the financial sector in eastern Europe.
  
• We did not see uncontrolled currency collapses, although we saw steep depreciations.
  
• We did not see a regression into irresponsible populist policy reactions.
  
• We did not see the emergence of large-scale civil unrest that challenged either the reform process or the democratic system.

The fact that we did not see this happen is significant, for these have been standard elements of emerging market crises in the past. It has not happened in the EBRD region, even though many countries suffered an enormous external shock and are now suffering large output declines. Furthermore, the region had accumulated significant vulnerabilities in the boom years. Yet the chaos and collapse some feared once external conditions changed for the worse have not materialised.

Why not? I would argue that there have been three reasons.

First, a high degree of maturity of institutions and policy-makers. We interpret this as evidence that the development and integration process that started after the collapse of communism has by and large worked. One example for this success is integration with the European Union.

Second, the fact that financial integration generally went along with long term commitments, particularly on the part of international banking groups.

Third, a strong level of international support. The International Financial Institutions, in particular, were quick to react and jointly we succeeded in implementing a number of important measures ranging from IMF standby-facilities to the €25 billion action plan announced by the EBRD, EIB and World Bank Group in February.

A measure of the progress achieved so far is the fact that the danger of large-scale retrenchment or withdrawal of western parent banks from eastern Europe has been averted and seems more unlikely now than only a few months ago.

We see that integration has cut both ways. On the one hand it has exposed the region to the crisis. On the other it has helped the region contain it.

The vulnerabilities that were the by-product of integration will have to be addressed over the medium term - in particular the over-dependence on capital inflows, foreign currency-lending and, in some countries, commodity exports. More will have to be done to strengthen domestic capital markets and diversify economies.

As we meet there is growing talk about the possible beginning of the end of the crisis. Banks are reporting better results than expected and confidence indicators are starting to point upwards again. As you know, EBRD economists are predicting a “bottoming-out” of the crisis in our region in 2009 and the beginning of a slow recovery in 2010 – but still under big caveats.

It is therefore time to start thinking about what this will mean for the EBRD region.

First, evidence shows that recovery following a financial crisis takes much longer than after a “regular” recession, on average 6 quarters rather than 3 quarters.

Second, we are faced with a double-crisis - of the financial sector and the real economy and we cannot yet even assess the impact the crisis has had on the latter.

Third, the crisis has not changed the high dependence of many EBRD countries on their ability to export to advanced countries and/or on commodity prices on the world market. Therefore their recovery will to a large extent depend on the course of recovery in the external world.

As a result, we expect the economies in our region to recover more slowly than after previous crises. Financing will be much scarcer than before. Even if more funds will eventually become available, a new global financial framework with binding regulations is needed to avoid the excesses that led to the collapse of the system.

The state has had to assume a pivotal role in the economy of many countries. Once the situation has stabilised we will have to pay for this: through higher taxes and reduced capacity for state expenditure because the state will have to start cleaning-up its balance sheet.

When we reach this point Emerging Europe will have a clear advantage over the advanced countries: tax levels are generally much lower and public finances in many countries are sound. Many of the most-advanced and most-efficient production facilities in Europe are today based in central, eastern and south-eastern Europe. Integration will once again be seen as a blessing as countries translate this advantage into real gains.

Before we get there, a lot of work needs to be done. From our experience as an investor in the region I would only like to stress the need to develop and strengthen local capital markets, to put the savings/loan-ratio on a sounder footing and to rapidly progress with the diversification of national economies.

It is true that huge pent-up demand in our countries of operations remains. But it may have been an illusion, an admittedly alluring one, to believe that countries could in a few years catch up with what had been destroyed or missed in the decades before. Neither the west nor the east will come out of this crisis unscathed, but the recovery period will be decisive.

The last time I saw Professor Buiter, who will take the floor in a few moments, was in March at the LSE. He had invited me to discuss with his students the pointed question: “Will the rich man’s crisis crush the emerging economies?” My answer then was “no”, and my answer today is still “no”. The price we may have to pay as a lesson from this crisis may be slower growth, but if it is more sustainable and continuous growth, it is a price well worth paying.

I wish you a successful conference and thank you for your attention. I will now ask my colleague Manfred Schepers, our Vice President Finance, to chair the first session and to introduce Professor Buiter.