A Tale of Three Countries: Recovery after Banking Crises

Highlights: • Iceland, Ireland and Latvia experienced similar developments before the crisis, such as sharp increases in banks’ balance sheets and the expansion of the construction sector. However the impact of the crisis was different: Latvia was hit harder than any other country in the world. Ireland also suffered heavily, while Iceland came out from the crisis with the smallest fall in employment, despite the greatest shock to the financial system. • There were marked differences in policy mix: currency collapse in Iceland but not in Latvia, letting banks fail in Iceland but not in Ireland, and the introduction of strict capital controls only in Iceland. The speed of fiscal consolidation was fastest in Latvia and slowest in Ireland. • Economic recovery has started in all three countries and there are several encouraging signals. The programme targets in terms of fiscal adjustment, structural reforms and financial reform are on track in all three countries. • Iceland seems to have the right policy mix. • Internal devaluation in Ireland and Latvia through wage cuts did not work, because privatesector wages hardly changed. The productivity increase was significant in Ireland and moderate in Latvia, yet was the result of a greater fall in employment than the fall in output, with harmful social consequences. • The experience with the collapse of the gigantic Icelandic banking system suggests that letting banks fail when they had a faulty business model is the right choice. • There is a strong case for a European banking federation.

Unintended consequences of crisis management

This contribution attempts to decipher the largely unintended, still predictable consequences of crisis management in the global economy. In a series of improvised, case-bycase and unilaterally demand-focused measures, governments tried to extend the Keynesian arsenal to a system whose basic features are unlike those of the national economy. While the collapse of output and employment, on par with the Great Depression, could indeed be averted, conditions for the resumption of sustainable finance and growth have been undermined.

Effects of the current financial and economic crisis on the rural landscape as well as the agri-food sector in Europe and Central Asia

This paper reviews the expected effects of the current financial crisis and subsequent recession on the rural landscape, in particular the agri-food sector in Europe and Central Asia (ECA) on the basis of the structure of the rural economy and of different organisations and institutions. Empirical evidence suggests that the crisis has hit the ECA region the hardest. Agriculture contributes about 9% to gross domestic product (GDP) for the ECA region as a whole with 16% of the population being employed in the agricultural sector. As far as the impact of the financial crisis on the agri-food sector is concerned, there are a few interconnected issues: (1) reduction in income elastic food demand and commodity price decline, (2) loss of employment and earnings of rural people working in urban centres, implying also costly labour reallocation, (3) rising rural poverty originating mainly from lack of opportunities in the non-farm sector and a sizable decline of international remittances, (4) tightening of agricultural credit markets, and the (5) collapse of sectoral government support programs and social safety-net measures in many countries. The paper reveals how the crisis hit farming and broader agri-business differently in general and in the ECA sub-regions.

Megmenthető-e az euróövezet? (Can the eurozone be saved?)

Az euró válságának szélesebb globális összefüggései vannak, mind a kiváltó okait, mind a nemzetközi pénzügyi rendszer működésének hiányosságait illetően. Az európai monetáris integráció szilárd reálgazdasági alapokon nyugszik. Az euró teljesítménye mind az árstabilitás, mind az árfolyamok ingadozása tekintetében megfelelőnek tekinthető. Az euróválság szuverénadósság-válság, és leginkább a zóna egyes (déli) országait érinti. Az euróválság okai többrétűek: ezek között az eurózóna hibás konstrukcióját, téves koncepcionális feltételezéseit, a politikai kompromisszumokkal folyamatosan megnyomorított működését említhetjük leginkább. A közös pénz önmagában nem oka a válságnak és nem is bűvös ellenszer. A hibás gazdaságpolitikáért belül ugyanúgy bűnhődni kell, mint kívül. Görögország, vagy Írország elsősorban nem azért került válságba, mert tagjai az eurózónának, hanem mert hibás gazdaságpolitikát folytattak. Nem zárható ki az eurózóna szétesése, de kicsi az esélye. / === / The euro crisis has broad global connections, both in terms of deficiencies of the international monetary system, and of the crisis of the global financial markets. The European monetary integration is based on strong real-economic foundations. The performance of the euro has been satisfactory both in terms of price and exchange rate stability. The present crisis is a sovereign debt crisis, and it is concentrated mainly on some Southern members. The causes of the crisis are manifold: wrong institutional and policy structures, mistaken conceptual assumptions, and the distortion of its operation by continuous political compromises. The contradictions between common monetary policy and the national fiscal policies, the failure of disciplining role of the markets, the weakness of control of national fiscal policies, the dangers of "one size fits all" monetary policy, the failure of finding the proper national policy mixes, particularly in terms of income and structural policies, and the underestimation of social and cultural differences, can be particularly stressed. The common monetary policy failed to secure the necessary equilibrium among liquidity, stability and growth. Greece and Ireland got in crisis not because they are members of the euro zone, but because of their mistaken economic policies. The collapse of the euro zone cannot be excluded, but the chances of it are limited.