20
Europe and Central Asia: A Time of Reckoning Luca Barbone
When the Europe and Central Asia (ECA) region celebrated the 20th anniversary of the fall of the Berlin Wall on November 9, 2009, the celebration occurred, in one of those coincidences of history, when the region was in the midst of its first generalized recession—and the most serious one that most countries had seen since the Soviet Union crumbled. The convergence toward western European living standards lifted millions out of poverty and created, in recent years, a rapidly growing middle class. This happened in the context of, and facilitated, a remarkable process of (a) political democratization and creation of new institutions that have made governments more accountable to the population; and (b) for several countries, integration into the European Union. But the achievements, of which the region is proud, also masked significant structural weaknesses. Because of its success in integrating into the world economy and in international financial markets, the region had become heavily dependent on external savings and external capital flows. Rapid growth increased public revenues, and this permitted fiscal consolidation, but also postponement of needed program reforms and even unsustainable increases in wages and transfers. When the recession struck, the fiscal position of most countries deteriorated sharply, presenting realities that necessitated sharp adjustments. As a result of the recession and 351