Crisis may be looming ahead in Eastern Europe

The increase in budget deficits and trade balance deficits posted by Eastern European countries, Romania included, may trigger a financial crisis such as the one that broke out in Asia in 1997, warns a story run by the German edition of Financial Times daily, Financial Times Deutschland. Romania and Bulgaria are deemed as “problem-children.”

According to the German daily, “problem-countries” such as Romania and Bulgaria have posted a “record” economic growth of five percent.

The “painful” experience of Asian countries shows however that high pace of economic growth does little or nothing regarding protection against “financial turbulence,” as there is also the reverse side of economic growth, namely increase of imports, while the dynamics of exports deflates.

This increase in imports does not necessarily lead to a crisis situation, while developing countries can resort to imports before they can produce high added value goods.

Financial Times Deutschland goes on to show that deficits can be covered by foreign investments in machines and equipment, but feels that Bulgaria and Romania, which it labels as “problem-children,” cannot possibly expect high volume of foreign investments, unlike Poland and Hungary. Moreover, the Asian crisis showed that solid foreign currency reserves cannot provide unbeatable protection, either.

The German newspaper focuses on Romania’s trade balance deficit, which amounts to almost seven percent of the Gross Domestic Product (GDP), as compared to a mere 3.8% in 2000.

According to a statistic study drawn by the Vienna Institute of Comparative Economic Studies (WIIW), Romania’s trade balance deficit is 6.6% of GDP, a level exceeded only by Latvia, with 7.1% deficit and Lithuania, which posted 6.8% in trade balance deficit.

At the same time, Bulgaria and Hungary post deficits of only 4.2% and 4.4% respectively.

The exports’ dynamics will also be affected by world trends, while the competitiveness level of goods produced in Eastern Europe is under pressure, following salary raises. Mediafax