The Financial Crisis and European Emerging Economies

The crisis has affected all European economies, but it has also brought into relief the substantial differentiation across the region. The authors demonstrate that it has put an increased premium on sound macroeconomic and macroprudential policies: economies with lower inflation, smaller current account deficits, and lower dependence on bank-related capital inflows have fared significantly better. They also show that the crisis has led to the disappearance of the so-called “halo effect”, which was the observation in the pre-crisis period that spreads on sovereign bonds in the new European Union member countries were lower than could be explained by fundamentals.