Development through Financial Integration? Lessons from Emerging Europe

Jeromin Zettelmeyer

wiiw Seminar Series 'Crisis Management in Central, East and Southeast Europe: What is to be done?' ,


Financial integration - in the form of large debt and foreign direct investment flows, and an increasing presence of foreign banks - has been an integral part of the development model of emerging Europe over the last decade. The region's slide into deep recession has raised questions about this model. The presentation will argue three points. First, the role of financial channels in the transmission of the crisis to emerging Europe is more subtle than it appears at first. While financial contagion obviously played a role, foreign bank ownership mitigated the capital flow reversal and the output decline. Second, unlike other emerging market regions, both macroeconomic and sector-level evidence shows that financial integration has boosted long-term growth in emerging Europe. Third, the process of financial integration - particularly large inflows of foreign financing - contributed to credit booms, excess leverage, and foreign currency lending that made the region vulnerable. Going forward, the challenge will be to embrace financial integration while better managing its risks.

Jeromin Zettelmeyer is Director for Policy Studies at the European Bank for Reconstruction and Development, where he heads research and country economic analysis. In this capacity, he headed the team writing the 2009 EBRD Transition Report 'Transition in Crisis?' and co-authored several chapters and background papers of the report. From 1994 until mid-2008, he worked at the International Monetary Fund, among others as an economist in the European II Department; as deputy head of regional studies in the Western Hemisphere Department; and, for over ten years, in the Research Department, where his research interests included financial crises, sovereign debt, international financial architecture and economic growth. He is the author, together with Federico Sturzenegger, of the publication Debt Default and Lessons from a Decade of Crises (MIT Press, 2007), an account of the sovereign debt crises of the last ten years. He is a German citizen, was born in Spain in 1964, graduated from the University of Bonn in 1990, and holds a Ph.D. from MIT (1995).


Countries covered: Visegrad countries