Integration's Toll on Eastern Europe

Integration into Western Europe's financial sphere brought huge benefits to the East but also greatly increased risks, a new EBRD study finds

By Andrew Willis

A new report by the European Bank for Reconstruction and Development warns that European financial integration has brought dangers as well as benefits for Central and Eastern Europe (CEE), while separate data suggest France is increasingly powering the EU's economic recovery.

Internal reforms and the eventual accession to the European Union in 2004 by eight formerly communist CEE countries brought with it a huge increase in the level of foreign credit and capital entering the area.

But while this financial integration has had an overall positive effect on the region, it also brought "significant costs" says the European bank (EBRD) in an annual report published on Monday (2 November).

These include: "encouraging credit booms and over-borrowing, and possibly in biasing the denomination of borrowing towards foreign currency."

As a result, CEE policy makers must now step up their management of financial integration, says the development bank, and above all wean their countries off an over-reliance on foreign debt.

The recent boom years brought with it a privatisation of the region's banking system and subsequent sale to larger western European banks, with Austria and Sweden in particular having a strong presence in the area.

While the reports says the presence of foreign banks had a positive effect once the crisis struck by reducing the outflow of foreign capital, it also warns that the high level of borrowing in foreign currencies needs to be halted.

Many families and businesses in the region had increasingly turned to foreign denominated mortgages and loans offered by foreign banks in the region before the financial crisis struck last year.

But the fall in European economic activity and local currencies have left many struggling to pay back their debts.

A failure to reduce dependence on foreign currency borrowing "could continue to pose a threat to stability," warns the report.

French powerhouse

Separately on Monday, fresh economic data pointed to the growing resurgence of the French economy, driven largely by domestic demand.

Purchasing managers' indices for manufacturing showed France performing significantly better than the continent's other main economies.

Germany saw the second strongest growth, followed closely by Austria and the Netherlands according to the data produced by the CIPS/Markit survey.

Strong car sales are an important factor behind the economic recovery in Europe's second largest economy, with sales up 20.1 percent month-on-month in October.

The French scrappage scheme and subsidies for less-polluting cars helped offset lower export demand.

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