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posted on 02 July 2015

The Success of the European Tiger

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The Great Recession of 2008 had a devastating impact on Europe; it was one of the worst downturns that the continent had ever seen. Nations that were once thought of as bastions of stability and growth experienced substantial decreases in economic activity. Germany, the richest country in Europe at the time, contracted by 2.1% while its neighbor, France, did so by 1.2%; however, this was nothing compared to what occurred in the East (Pfanner).

In 2009 alone, Hungary experienced a 17% decrease in industrial production, and unemployment in the Baltic's and the Balkans increased to around 15%, peaking at 20% in Latvia (Sharma). There was only one country that did not suffer through this, a country that is now being called the "Tiger of Europe."

While its neighbors were facing the full effects of the Great Recession, Poland, in 2009, was able to grow at a rate of 1.7% and their unemployment rate that year averaged at 8.1% (Pleitgen and Davies). This rate of growth was not on par with what they were accustomed to but, considering the situation, they were doing quite well. And, even though their unemployment rate seems high, it was significantly lower than what it had been in previous years.

There are essentially three reasons why the situation in Poland turned out the way it did. The first of these has to do with the way the currency was set up. Unlike the Bulgarian Lev or the Danish Kroner, the Polish zloty was not pegged to the Euro. This allowed for the currency to appreciate by more than 50% against the Euro during the period from 2004 to 2008 when there was private credit growth in the country (Klein). As a result, there came to be a sort of cushion what would provide some protection against recession. When the crisis hit the continent, lenders in the West began to pull their money out of Poland, causing the zloty to lose more than a third of its value when compared to the Euro (Klein). This deprecation stimulated the economy, and allowed the country's trade balance to shift from a deficit of 1.7 billion euro to a surplus of 100 million euro (Klein).

Another factor that allowed the country to thrive during the recession years was the Polish government's intervention in the economy. This intervention was known as the Vienna Initiative. According to the European Bank:

The Initiative has provided a forum for decision making and coordination that helped prevent a systemic banking crisis in the region and ensured that credit kept flowing to the real economies during the crisis. The Initiative specifically sought to limit the negative fallout from nation-based uncoordinated policy responses to the global crisis and to avoid a massive and sudden deleveraging by cross-border bank groups in emerging Europe (Vienna Initiative).

While the bank admitted that the program has not been a complete success, this mode of government intervention certainly had a large impact on the economic well-being of Poland.

The third and final factor that contributed to the economic stability of Poland in 2008 was their practice of counter-cyclical fiscal policy. That is, "government policy aimed at reducing or neutralizing anti-social effects of economic cycles" (Business Dictionary).

Two years after the end of the Great Recession for many northern European countries (Note: Germany ended its recession in 2009), Poland is still doing remarkably well. According to Miron Wolnicki, a researcher at Villanova University, Poland is in a "sweet spot". As a member of the European Union they have been able to developed strong financial institutions, acquire funding for infrastructure, and receive extensive investment from their neighbors, especially Germany. In addition, Poland still gets close to 100 billion euro of subsidies from the EU in the current budget cycle. More importantly, even though Poland is an EU-27 member they are not part of the Eu-18 (Eurozone). This means that they do not have to participate in the Greek bailout and they can devalue the zloty to push exports.

Now, on a less positive note, unemployment in Eastern Europe is very high, and the closeness to Ukraine has created a lot of problems for Poland. Furthermore, some economists believe that the only reason why the country has been doing so well these past few years is because they have been able to leverage funding from the European Union. However, now that the EU budget is decreasing that funding is likely to diminish significantly and, as a result, a recession may ensue (Rae).

All in all, Poland's method of dealing with what occurred in 2008 demonstrates that the government and its institutions are quite competent in the face of disaster. And, while their methods may not necessarily be applicable in any other context, they nevertheless represent a major success in economic policy.

Works Cited

Klein, Matthew C. "Learning from Abroad Don't Forget Poland." The Economist. The Economist Newspaper, 18 Dec. 2012. Web. 30 June 2015.

Pfanner, Eric."Europe Slump Deeper Than Expected." The New York Times. N.p., 13 Feb. 2009. Web. 29 June 2015.

Pleitgen, Fred, and Catriona Davies. "How Poland Became Only EU Nation to Avoid Recession." CNN. N.p., 29 June 2010. Web. 29 June 2015.

Rae, Gavin. "After Years of Above-average Growth, Poland Now Faces the Spectre of Recession." EUROPP. The London School of Economics and Political Science, 08 July 2013. Web. 30 June 2015.

Sharma, Ruchir. Breakout Nations: In Pursuit of the next Economic Miracles. New York: W.W. Norton, 2013. Print only.

Vienna Initiative. N.p., n.d. Web. 30 June 2015.

"What Is Counter Cyclical Policy?" Definition and Meaning." N.p., n.d. Web. 30 June 2015.

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