Volatility Of Capital Flows In Emerging European Economies: Lessons From Asia

Low interest rates in advanced economies contributed to massive private capital flows around the world in search of higher rates on investment in the final decades of the past century and the beginning of this one. Emerging market economies in Europe became an attractive destination for significant amounts of that capital, most notably foreign direct investment, given their political and economic reforms, including opening up and liberalization of their capital accounts. Closing the gap between domestic saving and investment in those countries the FDI received helped improve the growth performance of those economies. However, it also contributed to the formation of large current account deficits. The global financial and economic crisis of 2008-2009 changed the push factors in the advanced economies and the previously abundant capital flows to the emerging European economies slowed down significantly. That immediately affected the growth rates but the current account deficits remained large. The aim of this paper is to investigate how the emerging European economies reacted to the sudden stop in international capital flows and what are the consequences. The inspiration is to look at the Asian economies that after their financial crisis of 1997-1998 emerged stronger than before, running persistent current account surpluses and becoming major creditors in the world. The analysis is based on the IMF World and Regional Economic Outlook databases, the Eurostat, the Asian Development Bank sources and the National Banks' data in European countries.