Transition takes longer than many expect. This is not only to do with institutions or the structure of an economy but also about the mentality of the people.
If markets function well, if there is a stable political regime that allows for democratic change, if there is trust in an efficient legal system, if the administration does its job – these are the minimum elements of a successful transition.
But one cannot conceive of a global economic turmoil of the size we are currently witnessing without any political impact. What the crisis has revealed is that in most of our countries of operation, transition has advanced less than originally thought.
The economic picture is mixed. We see the economy in the United States is in not too bad shape; within Europe, some countries within our region of operation are doing relatively well, such as Poland.
But the worsening situation in the eurozone comes from a rising awareness that austerity, as necessary as it is, comes at a cost, and that engaging in structural reforms in a very short period of time, makes things even more difficult.
Unfortunately, if for years you pursued a path of unsustainable growth, asset bubbles and reducing your cost competitiveness, you cannot expect to remedy this within one year.
In a number of countries the hardship people must bear is quite severe. But my sense is that in most countries of central and eastern Europe, there is a willingness to go through austerity and less anxiety about the downsides of such a policy.
For instance in the Baltic countries, there is an amazing willingness among people to go through a very difficult period of time and, from what we see right now, with a return to growth.
Whether or not there is a backlash against austerity often depends on whether there is a feeling that politics is doing things right, that governments are not conflicted by internal problems, including corruption. The quality of leadership plays a big role: if leadership is credible, there is quite some support for tough measures, but if not, then not.
I don’t believe there is a realistic chance of a breakup of the euro area, but there is a higher probability of Greece leaving the euro. This would be very harmful for the country and potentially for the eurozone as well, although that would not put in question the eurozone as a whole.
We don’t see any imminent risk of a credit crunch in central and eastern Europe. What we see is an ongoing deleveraging. The cross-border banking model which has helped the region needs to be supported and sustained.
There was a clear understanding among the respective stakeholders that a “Vienna 2.0” Initiative would make sense, although it differs from Vienna 1 in that this time it is not about preventing deleveraging, but rather trying to shape an unavoidable degree of deleveraging in a way that reduces the risks for the regional economy.
What we tell commercial banks is that central and eastern Europe will continue to grow at a higher rate than western Europe. So for those banks that have developed a good and sound business model it still makes sense to invest.
It will be more difficult for small and medium-sized companies to finance themselves through bank loans. New avenues for funding need to be developed and this is what we’re trying to contribute to, either by bringing in new actors, including private equity funds, or by helping those countries to improve the conditions for strengthening and deepening local capital markets.
In the coming years, the EBRD needs to prove that with the money allocated to the southern and eastern Mediterranean, we can make a difference just as we have done in central and eastern Europe.
You can’t judge the huge political developments in North Africa in terms of one year. These are fundamental changes to a region after centuries. It will take a long time until new structures are established that are robust.
We will not engage in all places in the southern and eastern Mediterranean. There are certainly countries which, even if were legally permitted to engage, we would not for political or economic reasons. It will be difficult, it will be different from country to country but remember how many people were sceptical when the Iron Curtain fell – and at that time certainly the economic environment was easier than today.
Against that backdrop, the EBRD’s experience and its private sector orientation is taken as a very important asset as more and more of our sister organisations increase their focus on private sector activities.
The EBRD is a very interesting institution in that it tries to combine the asset of having a public mandate with the delivery capacity of a private sector-oriented institution. As we see, major difficulties within the traditional banking sector on the one hand and with the financing of public goods through state budgets on the other, further developing this specific strength will be very important.
Thomas Mirow is president of the European Bank for Reconstruction and Development. He was interviewed by Taimur Ahmad