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The Warsaw Voice » Business » October 28, 2009
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Crisis Changes Europe
October 28, 2009   
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Economist Prof. Dariusz Rosati, foreign minister 1996-97 and a member of the European Parliament from 2004 until earlier this year, talks to Andrzej Ratajczyk.

How has the global financial crisis-which started in the United States but soon spread throughout the world-changed Europe?
The crisis has changed the European perception of the economy and politics. Some realized that financial markets don't always behave rationally and predictably, and that sometimes investors panic en masse. Others learned that traditional methods of fighting the crisis through government and central bank intervention can still work today. And it was government interventions and the big money they pumped into various sectors, especially the financial one, that prevented the United States and Europe from falling into a deep and lengthy crisis.

We have realized how much different markets are interlinked. Due to globalization, a "plague" that affects one financial or economic system immediately spreads to another elsewhere in the world. One negative implication of the financial systems' integration which comes with globalization is that Poland and other Central and Eastern European countries are now suffering dire consequences of some past events and activities that were beyond their influence or responsibility. This lesson showed that even though international economic integration may have many positive aspects, it is also connected with a certain level of risk.

Have the EU states and institutions succeeded in tackling the crisis? Are the anti-crisis measures working?
Crises are very often conducive to protectionism. Fortunately, this time round European institutions and other bodies managed to counteract egotistic and protectionist tendencies, which led to a certain level of coordination of activities. EU member states understood that by protecting their own economies only, they would actually do more harm than good. Such a scenario would make everyone suffer in the end. Instead, the EU reacted fairly quickly by releasing an anti-crisis package and taking a series of activities aimed at creating regulations against a future crisis. In this respect I think the European institutions did well.

And even though individual states held different opinions on details, such as the fiscal policy or pay cuts for bankers, we generally saw large-scale international cooperation that helped prevent the two calamities of the Great Depression of the 1930s-protectionism and monetary contraction. The reaction against protectionist tendencies coupled with the opening of markets helped the Polish motor industry, which benefited from premiums introduced in Germany for those trading in old cars.

According to forecasts by the European Commission, Poland is likely to be the only EU country to report economic growth this year. What, in your opinion, contributed to the relatively good results of the Polish economy?
First of all, we must beware of being overoptimistic; the crisis in Poland is not over yet. And we might see a small GDP fall in the third or fourth quarter of the year, but in fact Poland ranks quite high among other countries. Paradoxically, Poland managed to avoid a deep crisis because it had never experienced the level of credit expansion observed in many other countries. Polish companies are much less dependent on credit than their counterparts in other countries because they tend to rely on their own funds. Consequently, they were far less affected than many of their foreign counterparts when banks began to limit lending.

Polish companies didn't have so much speculative capital which suddenly dries up at times of crisis leading to a market breakdown. This is what the Baltic states experienced in recent years due to large-scale credit expansion financed by foreign capital. And theories which hold that Poland didn't suffer much due to a relatively small proportion of exports in the GDP have proven inconclusive. Take Romania, for example, which is going through serious economic problems despite very small export levels.

Another factor that helped Poland was the free-floating exchange rate. It turned out that countries with a fixed exchange rate, such as the Baltic states or Bulgaria, as well as those preparing to enter the eurozone, including Slovakia and Slovenia, faced much more serious problems. To sum up, Poland is weathering the crisis quite well thanks to a relatively small credit expansion and a free-floating exchange rate. At the same time, despite earlier announcements, the government has considerably increased public spending financed from the budget deficit. So far all these factors have helped Poland avoid a recession.

Does Poland, as one of the fastest growing countries in Europe, have a chance to become a regional financial hub?
Poland is already the largest market in Central and Eastern Europe, which is not necessarily a good thing. It is from this country, with the highest level of foreign capital, that investors first began to withdraw readily convertible assets. This, in turn, brought a substantial weakening of the Polish currency. And to become a regional financial hub, a country needs to provide an appropriate market depth, gain investor confidence and meet institutional conditions.

I don't think Poland will be ready to become one within the next few years. The competition is too strong-take the neighboring euro zone or not-so-distant London, the largest center of finance in Europe if not worldwide. Poland is bound to continue as an emerging market where you can make big money, but you also have to be prepared for a certain amount of risk. On the other hand, the fact that the crisis has only had a slight effect on Poland means that some of the capital so far flowing to the Baltic states, Hungary, Romania or Bulgaria, may now be channeled to Poland, which will definitely strengthen the country's position in the region.
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