Feature story

Chief Economist Erik Berglof on the EBRD's latest growth forecasts

The EBRD revised its forecasts for economic growth in the EBRD region on January 27, predicting expansion of 0.1 percent year compared with an earlier 2.5 percent forecast made in November last year.

Please follow this link to read the press release: http://www.ebrd.com/new/pressrel/2009/090127.htm

In comments to EBRD staff, which were published in EBRD's internal magazine, Chief Economist Erik Berglof mapped out the reasons for the decline, pointing to a faster than expected drop in output in the countries where the EBRD invests in the last quarter of 2008 and the worse than anticipated drop in global demand. Mr Berglof also stressed the importance of western banks’ continued support for the eastern subsidiaries.

Please see below the interview in full, from which you are welcome to quote.

Why has there been such a big drop – 2.4 per cent – in forecasted average growth for the region in just a few months?

Two things have changed since November. Firstly, the figures that our countries of operations published at the end of last year – for industrial production and for GDP – were worse than we had anticipated. Secondly, the fall in fourth-quarter global demand was much greater than expected and our region depends on exports. This is especially true of countries in central and south eastern Europe.

However, the region’s financial systems are still functioning, thanks to the critical parent bank link. The parent banks are contracting but they haven’t abandoned their subsidiaries in our countries of operations, which is very important. This is something we are trying to support. We are working with the other international financial institutions, home country governments and host countries to ensure that the different parties coordinate their responses and avoid any unilateral actions that could undermine financial stability.

How do you convince recession-hit governments in western Europe to spend their taxpayers’ money on supporting banks in eastern Europe?

It is very difficult to get home country governments to use taxpayers’ funding for subsidiaries abroad. However, countries such as Austria, Italy and Sweden do have a long-term interest in maintaining these financial networks abroad. In the current situation, it also makes it easier if you can show that there is a response from the countries where the subsidiaries are located and that you are part of a coordinated international effort.

Can the region do anything itself to alleviate the economic crisis or does it just have to wait for growth in the rest of the world to pick up?

There is an element of waiting. Most countries in the region don’t have the resources to back large financial institutions, to fully back deposit guarantees or to do large stimulus packages for consumption and investment. Sometimes, they even have to do the opposite, as is the case in the Baltic countries.

The crisis does present countries with opportunities to restructure financial institutions and the corporate sector and to pursue reforms. But this region as a whole is quite integrated into the world economy. This is the long-term growth model for our countries of operations, which means that in the current situation they are vulnerable.

Do bank bailouts and massive state rescue packages in western economies undermine the Bank’s transition message?

Most of the measures that we are seeing in the West are temporary: they are things you have to do in a crisis. We will see similar measures in our countries to the extent that their governments have the resources to implement them. But these should not be viewed as an invitation to continue state intervention in the economy.

In the long term, the financial crisis shows that we need to think not only about states as owners but also as regulators and supervisors. We should focus not only on the size of the state sector, but also its quality and what it delivers to the corporate sector and the public. Until recently, we maybe didn’t fully take on board the need to have effective government supervision of the economy and this is one of the lessons from the crisis both for western economies and for our region.

What can the EBRD do to improve the quality of government supervision?

A lot can be done in the context of projects and the Bank’s work already reflects this. For example, our municipal infrastructure and power sector deals place a lot of emphasis on regulation.

Now we also have to think about the broader context of the banking system and ways of anticipating problems. The Bank has a role in public-private coordination, as shown by a recent meeting in Kiev where we brought together the banks and the government to discuss the situation in Ukraine. The EBRD can draw on its experience of the private sector and its contacts in the public sector to help coordinate responses to the crisis.

By By Mike McDonough, Communications Adviser
28 January 2009