Right from the start, the countries of Central and Eastern Europe embarked on a hugely ambitious path of reform. Leaving aside differences across countries, a long and challenging process of economic transformation brought countries in the region significant improvements in incomes and living standards. Full membership of the EU – or the prospects of accession – provided an important stimulus for the process of transformation as well as an anchor of stability.
In Trichet's view, the return to the convergence path is being achieved thanks to a combination of four main elements.
First and foremost, there are domestic policy actions to address macro-economic imbalances at the national level. The precise policy actions differ across countries, reflecting the different country-specific challenges and policy frameworks in place. But the actions generally require a strong fiscal adjustment and/or measures to maintain confidence in the soundness of the financial sector.
Second, the reaction of the international community has been essential. Where funding challenges became more acute, international financial assistance led by the IMF – jointly with the EU in EU Member States – has been crucial in supporting market confidence and avoiding financial crises. The balance of payments support facility available for EU Member States has been reactivated, while the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank have supported several countries. Some European countries have also provided bilateral financial support.
Third, the private sector, represented by the foreign banks active in the region, has by and large maintained its exposure to the region, helped by the informal forum known as the “Vienna Initiative”. By avoiding a large-scale uncoordinated withdrawal of cross-border banking groups from Central and Eastern Europe, a systemic crisis in the region could be avoided.
Finally, the ECB is also making a key contribution. For example, by providing extensive liquidity provision to parent banks established in the euro area, the subsidiaries of those banks in Central and Eastern Europe are indirectly benefiting from this ample liquidity.
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