GOLDEN GROWTH
emerging Europe are also a positive aspect of their integration experience. This does not make emerging Europe immune to potential spillovers from troubles in the eurozone (such as a deleveraging on the part of parent banks), but the countries in the east and southeast of Europe would appear to be in more robust external health than their more advanced peers in Europe’s south. Still, concerns remain and debt dynamics are worrying given the lack of growth in the region and the many uncertainties that still affect the recovery of the global economy; in other words, downside risks remain high.
Governments—largely solvent High public debts can adversely affect capital accumulation and growth by raising inflation, distortionary taxes, long-term interest rates, and policy uncertainty. Reinhart and Rogoff (2010) find that differences in median growth rates of GDP between low-debt countries (less than 30 percent) and high-debt countries (above 90 percent) amount to 2–3 percentage points a year. Kumar and Woo (2010) find that a 10 percentage point increase in public debt ratios is linked to a slowdown in annual real per capita GDP growth ranging from 0.15 in advanced economies to 0.25 in emerging markets. They argue that this difference might reflect less developed financial markets or fragile access to international markets. Emerging Europe is likely to be better off on both counts. By these criteria, countries in emerging Europe are not generally at risk of a public debt overhang. Many have public debt levels only slightly above the lower threshold of 30 percent: the regional average was 37 percent of GDP at end-2009. Emerging Europe’s public debt ratios are, in most cases, lower than in Western Europe, EU cohesion countries, and countries that suffered economic crises in the recent past (figure 3.16, vertical axis). The one risk country is Hungary, where public debt ratios reached 78 percent of GDP at end-2009. While smaller than those observed among EU cohesion countries (the median
Figure 3.15: Most economies in emerging Europe are liquid (ratio of gross liabilities to foreign exchange holdings, 2009)
Note: Higher columns indicate greater risk of suffering foreign exchange liquidity problems. The dark green columns are capital account crises countries in East Asia and LAC (Latin America and the Caribbean) regions in the 1990s and 2000s as well as Russia in 1998 and Turkey in 2000. The data for capital account crises countries reflect liquidity ratios a year before the crisis. The light green columns are the 2009 regional median values for East Asia and LAC. Source: Brown and Lane 2011.
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