Policy Documentation Center

Electronic Newsletter "Bell". Issue 9 (9)

Kosovo Debate on European Issues: a compilation of eight Policy Papers in the area of education, rule of law and economy

E-mail: research@research.by
тел./факс: +375 17 2100105
2009 © Исследовательский центр ИПМ
Recent Developments and Impact of the 
International Financial Crisis on Belarus
Dzmitry Kruk, 
Alexander Chubrik, 
IPM Research Center
© Исследовательский центр ИПМ, http://research.by/
2
Contents
1. New trends in the global economy 3-10
2. New challenges for the Belarusian economy in 2009 11-17
3. Russian economy and demand for Belarusian exports 18-20
4. Strategic threats and opportunities 21-22
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3
New trends in the global economy 
(1)
1. Since August-September 2008 a new stage of 
the global crisis has begun. NPL and bad 
assets of the financial sector led to the “trust 
crisis” at the financial markets, which resulted 
in credit rationing and finally led to second 
crunch at the stock markets (Lehmann Brothers 
bankruptcy became the symbol of the new 
stage of the crisis).
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New trends in the global economy 
(2)
2.After almost one year of the financial system contagion, 
the crisis began to propagate to the real sector of the 
economy.
3.In September-November 2008 the measures of the 
central banks and governments were intensified in order to 
prevent the recession in the real sector.
4.However, majority of the developed countries stepped into 
the recession rather rapidly. At this stage their demand was 
reducing because of the investments and consumption of 
luxury goods. The latter provided also diminishing trade 
between developed countries.
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New trends in the global economy 
(3)
5.Correspondingly the demand in developed countries for 
raw goods (mainly from emerging countries) dropped as 
well, which led to a rapid decrease of the prices for raw 
goods.
6. In November-December the monetary policy in majority 
of developed countries were softened radically, which led 
to the discussion about the liquidity trap.
7. Decrease in employment during November-December 
led to further substantiall decrease of the demand mainly 
due to the consumption, which made the recession 
unavoidable.
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New trends in the global economy 
(4)
8.Since the end of 2008 developed countries faced 
with deflationary pressure, due to the reduction of 
the aggregate demand.
However, at this stage the trends between 
developed countries and developed ones seems to 
be divergent.
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New trends in the global economy 
(5)
During last years majority of emerging economies 
operated under the substantial deficit of current account 
of the balance of payments. In condition of high liquidity 
investments and borrowings from abroad allowed to 
finance the deficit.
Another group of the emerging and transitional 
countries rich with natural resources provided positive 
current account basing just on trade with these 
resources.
Both groups faced with: (i) decrease of external demand 
for both commodities and natural resources, (ii) huge 
decrease of prices for natural resources, (iii) extremely 
rigid access to foreign borrowing.
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New trends in the global economy 
(6)
Thus all developing countries faced with the pressure 
on their exchange rates and had to depreciate it (those 
with the flexible forms of exchange rates).
Countries with any form of the pegs, could not but have 
to devalue their currencies immediately (Belarus, 
Kazakhstan).
However, depreciation of the national currency leads to 
the inflationary pressure for the developing countries. 
Thus, they face at the same time with reducing demand 
and deflationary pressure because of it, but inflationary 
pressure because of the external disequilibrium. 
Finally, majority of developing countries will face 
with recession under inflationary pressure as the 
total effect.
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New trends in the global economy 
(7)
Possible further stages of the global crisis.
1. Impact of the real sector on the financial system, 
which might lead to the second stage of the financial 
institutions crises because of the bad assets and 
NPLs (this stage seems to be unavoidable and 
perhaps it has already begun).
2. Global bank panic (the crisis of banks’ liabilities).
3. Global debt sovereign crisis.
4. Global currency crisis (basing on the one of the 
reserve currencies).
5. Depression of the real sector (seems to be 
unavoidable under any scenario).
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New trends in the global economy 
(8)
Possible further stages of the global crisis.
6. Limitation of the negative expectations for the real 
sector.
7. Recovery of the global economy.
8. Reform of the global financial system.
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New challenges for the Belarusian 
economy in 2009 (1)
1.The negative landscape of the external 
environment will lead to lowering demand for the 
Belarusian exports, which sharpens the problem of 
balancing external economic activity
2. In one row with other transition economies, 
Belarus faces the pressure on its exchange rate 
and inflationary pressure
However, besides the problems originated from 
the global crisis, negative external environment 
also sharpens the problems of the Belarusian 
economy associated with its structural distortions
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New challenges for the Belarusian 
economy in 2009 (2)
External sector:
? Exports to Russia and competitiveness at the Russian 
market is of prior concern.
? Declining prices for raw materials (oil and oil products, 
potash fertilizers, ferrous metals) will decrease 
revenues from external trade.
? Restriction of imports means either decreasing 
production (through intermediary imports) or restriction 
of investments imports, which has negative medium-
term consequences.
? Only “official” finance seems to be available for 
Belarus, i.e. intergovernmental loans and loans for 
International Financial Institutions
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Exports and imports of goods, Russia
? Volumes, growth rate ? Average prices, growth rate
-30
-20
-10
0
10
20
30
40
50
60
j
a
n
0
8
f
e
b
0
8
m
a
r
0
8
a
p
r
0
8
m
a
y
0
8
j
u
n
0
8
j
u
l
0
8
a
u
g
0
8
s
e
p
0
8
o
c
t
0
8
n
o
v
0
8
d
e
c
0
8
% yoy
exports imports
-30
-20
-10
0
10
20
30
40
50
60
j
a
n
0
8
f
e
b
0
8
m
a
r
0
8
a
p
r
0
8
m
a
y
0
8
j
u
n
0
8
j
u
l
0
8
a
u
g
0
8
s
e
p
0
8
o
c
t
0
8
n
o
v
0
8
d
e
c
0
8
% yoy
exports imports
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Exports and imports of goods, non-CIS 
countries
? Volumes, growth rate ? Average prices, growth rate
-30
-20
-10
0
10
20
30
40
50
60
j
a
n
0
8
f
e
b
0
8
m
a
r
0
8
a
p
r
0
8
m
a
y
0
8
j
u
n
0
8
j
u
l
0
8
a
u
g
0
8
s
e
p
0
8
o
c
t
0
8
n
o
v
0
8
d
e
c
0
8
% yoy
exports imports
-20
0
20
40
60
80
100
j
a
n
0
8
f
e
b
0
8
m
a
r
0
8
a
p
r
0
8
m
a
y
0
8
j
u
n
0
8
j
u
l
0
8
a
u
g
0
8
s
e
p
0
8
o
c
t
0
8
n
o
v
0
8
d
e
c
0
8
% yoy
экспорт импорт
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New challenges for the Belarusian 
economy in 2009 (3)
Financial sector: Current peg seem to be assessed 
by economic agents as “as less than fully credible 
monetary policy”, which leads to:
? Dollarization of economic agents’ assets
? Distortions at the credit market
? Additional inflationary pressure, because of the 
lowering money demand
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New challenges for the Belarusian 
economy in 2009 (4)
Domestic demand
? Lack of the sources of finance for investments 
? bank loans and/or government finance is 
needed
? The tendency for declining consumption might 
be struggled only through the budget policies. 
but increase of salary higher than productivity 
and/or budget transfers will lead to: (i) declining 
external competitiveness, (ii) budget deficit, (iii) 
additional demand for foreign currency.
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Contribution of aggregate demand 
components to GDP growth in 2008*
* Percentage points
 2008Q1 2008Q2 2008Q3 2008Q4 
GDP, % yoy 11.2 10.5 11.2 7.5 
Final consumption: 6.1 7.6 11.7 6.5 
households 5.8 7.4 11.8 6.4 
general government 0.3 0.1 -0.1 0.2 
NPISHs 0.0 0.0 0.0 0.0 
Gross capital formation: 8.0 10.4 7.9 11.7 
gross fixed capital formation 6.4 9.8 6.4 9.0 
change in inventories 1.6 0.6 1.6 2.7 
Net exports of goods and services -2.8 -7.8 -10.4 -14.1 
exports 13.5 3.1 -1.0 -8.3 
imports -16.3 -10.9 -8.3 -5.8 
Statistical discrepancy -0.2 0.3 1.9 3.4 
Domestic demand 14.2 18.0 19.6 18.2 
 
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Russian economy and demand for 
Belarusian exports (1)
1. The estimations shows that the Russian GDP 
is main drive factor of the Belarusian exports.
2. However, real exchange rate also matters at 
the Russian market
3. Relationship in labor productivities is one more 
factor that determines competitiveness of the 
Belarusian exporters at the Russian market
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Russian economy and demand for 
Belarusian exports (2)
In 2009, two main tendencies at the Russian 
commodities markets will take place:
? Contraction (or at least huge deceleration of 
growth) of the market volumes.
? Reallocation of the market segments between 
one commodity group for the benefit of the 
cheaper segments. I.e. the price might be more 
serious factor of competitiveness during the 
period of recession.
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Russian economy and demand for 
Belarusian exports (3)
The 1st tendency will deteriorate the competitive 
positions of all producers at the Russian markets. 
However, the 2nd tendency might be beneficial for 
producers of the lower segments of the market. 
Belarus may gain due to the 2nd tendency, but the 
1st tendency is much stronger.
The relationship between these tendencies and 
competitiveness of the Belarusian producers will 
highly depend on Russian’s economy growth rate 
(according to the forecasts it might be among -2.0 
down to -5.0% yoy)
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Strategic threats and opportunities (1)
1. Privatization and rapid restructuring during the 
crisis may be questionable from the point of 
view of short-term results, but may give a 
strong positive long-term benefit.
2. The balance of external trade seems to be an 
important goal for a long-term.
3. However, restructuring of the energy industry 
and increasing efficiency of the energy 
consumption may determine a substantial 
limitation of the raw imports.
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Strategic threats and opportunities (2)
4. Changing the monetary policy regime may return the 
trust to the NBB by the economic agents. Further it will 
lead to the decrease of dollarization and more trust to 
the Belarusian banking system.
5. While new competitive advantages in external trade 
require a long period, Belarus may consider formation 
of new relations in world financial system as the major 
opportunity, trying to concentrate financial flows 
between developed world and Russia after the reform 
of the world financial system. For these, new 
Regulations in this sphere are to be adopted in Belarus 
in advance in comparison to neighboring countries.


English

Recent developments and impact of the international financial crisis on Belarus

 1
 
Press Release  
Institute of Public Finance • Smičiklasova 21 • 10000 Zagreb 
Tel. (+385 1) 4886-444, Fax. (+385 1) 4819-365 
www.ijf.hr • office@ijf.hr 
  
 No. 10            Zagreb, May 12, 2009
 
 
Economic Crisis and State Aid 
 
 
Marina Kesner-Škreb, MSc 
 
 
In view of the economic crisis, the European Commission has temporarily relaxed 
the rules enabling Member States to grant state aid to companies. As Croatia fully 
applies the EU aquis communautaire relating to state aid, it is also among the 
countries allowed to implement the new measures. However, despite being 
permitted, it is questionable to what extent the new state aid measures will be 
applicable in Croatia, given the scarcity of budgetary resources as the main 
constraint. 
 
At its session held on May 7, 2009, the Government of the Republic of Croatia enacted a 
decision on publishing the Temporary Community framework for State aid measures to 
support access to finance in the current financial and economic crisis (hereinafter: 
Temporary framework) adopted by the European Commission and published in the Official 
Journal of the EU on April 7, 20091. By signing the Stabilization and Association Agreement, 
Croatia has undertaken the commitment to implement the rules on control of state aid which 
are applied in the European Union. Accordingly, the entire EU aquis communautaire in the 
field of state aid has been translated and published in the Official Gazette, thus becoming 
binding on all government authorities in Croatia responsible for granting state aid, as well as 
on the Croatian Competition Agency which approves and controls state aid. Therefore, as 
soon as they are published in the Official Gazette, the new EU state aid measures, included 
in the Temporary framework, will be applied to state aid in Croatia. The Government will 
thus have another instrument at its disposal to deal with the consequences of the crisis in 
the real sector. Below is a brief question-and-answer presentation of the idea and content of 
the Temporary framework. 
 
Is state aid permitted in the EU? 
Basically, there is a ban on state aid in the EU. However, the ban does not apply universally 
or unconditionally, so that state aid may be allowed and justified under some circumstances, 
which is governed by detailed rules. The implementation of state aid rules in the EU is 
monitored by the European Commission, and in Croatia, until its accession to the EU, by the 
Croatian Competition Agency. 
                                                 
1 Croatian translation available at: 
http://www.vlada.hr/hr/naslovnica/sjednice_i_odluke_vlade_rh/2009/81_sjednica_vlade_republike_hrvatske . English text available 
at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2009:083:0001:0015:EN:PDF. 
 2
Should the use of state aid be expanded during the crisis? 
The global financial market crisis and its impact on the real economy have raised the 
question of how strictly the European Commission should apply the state aid rules, or how 
far it should go in relaxing their implementation in order to mitigate the recession 
consequences. The Commission decided to adopt the Temporary framework in order to 
enable Member States to use additional state aid to cope with the shortage of credit and its 
effects on the real economy. The companies' access to finance is a precondition for 
investment, growth and job creation by the private sector. However, as a consequence of 
the financial market crisis, banks have become much more risk-averse than in the previous 
years, thus obstructing access to credit. Such circumstances could also affect healthy 
companies which would be faced with shortage or even unavailability of credit. This 
Temporary framework introduces a number of measures enabling Member States to facilitate 
the companies’ access to finance. 
 
Why not simply lift state aid control during the crisis? 
Such difficulties could also affect healthy companies which will be faced with a shortage or 
even unavailability of credit. This temporary framework introduces a number of measures 
enabling Member States to provide companies with easier access to finance. 
 
Why not simply lift state aid control during the crisis? 
State aid control is important during the financial and economic crises, because Member 
States could be strongly tempted to grant aid to companies within their own territories, thus 
threatening the operations of companies on the single EU market, i.e. distorting market 
competition. In such a case, given the distorted internal market, the crisis would even grow 
worse. The state aid control also helps avoid the so-called 'subsidy race', which is 
particularly detrimental to smaller Member States having less abundant funds to compete in 
such 'races' than big Member States. 
 
What measures does the Temporary framework include?  
It includes the following: 
• lump sum of aid up to EUR 500,000 per company for the next two years (instead of 
the current EUR 200,000); 
• state guarantees for loans at a reduced premium; 
• subsidised loans, in particular for the production of "green products"; and 
• risk capital aid up to EUR 2.5 million per SME per year (instead of the current EUR 
1.5 million). 
The legal basis for these measures is laid down in the EC Treaty allowing Member States to 
use state aid to remedy serious disturbances in their respective economies. The current 
financial crisis can certainly be considered as a serious disturbance, and consequently, the 
described state aid is permitted. 
 
What is the deadline for the application of these measures?  
All the measures are temporary and are applicable until 2010. In fact, the Commission 
envisages that lending to undertakings will resume its normal levels in the near future, and 
that the need for these measures will disappear. However, should the problems persist, the 
Commission will consider extending the measures beyond 2010. 
 
 3
Do the measures cover all companies in difficulty? 
There are undertakings which have sound business plans but, owing to rigid credit market 
conditions, their access to capital is limited. According to the Temporary framework, it is 
exactly these companies that are eligible for state aid. Accordingly, pursuant to the rules of 
the Temporary framework, an undertaking which was not in difficulty on July 1, 2008 (i.e. 
before the financial crisis), but got into difficulty after that date, is entitled to state aid 
according to the new rules. Long-standing loss-makers or undertakings which have been in 
difficulty for a longer period of time are not entitled to use the new measures. 
 
How many measures under the Temporary framework have been approved by the 
European Commission? 
By April 22, 2009, the Commission granted 29 aid measures in twelve Member States, 
aimed at stabilizing companies and saving jobs in the real economy. The measures were 
granted to Austria, Belgium, France, Germany, Hungary, Ireland, Latvia, Luxembourg, the 
Netherlands, Portugal, Spain and Great Britain. The first two measures were granted to 
Germany, namely a credit program worth EUR 15 billion to ensure liquidity of undertakings 
facing credit crisis, and, after that, a non-repayable grant scheme of up to EUR 500,000 per 
undertaking to be administered by local, regional and state authorities. 
 
What does the Temporary framework mean for Croatia? 
As it has applied the acquis communautaire in the field of state aid even before the 
accession to the EU, Croatia is also allowed to implement the new measures. The extent to 
which the measures will be implemented basically depends on two things: first, the 
availability of budgetary resources, and second, political consensus. Specifically, the 
economic crisis has adversely affected the already tight state budget which is likely to be 
revised again in autumn. Given the limited funds, new state aid can only be financed 
through the reallocation of funds among budgetary users. However, this requires a general 
political consensus. 
 


Newsletter no. 10. Economic crisis and state aid

The Institute of Public Finance deals with economic research and analysis related to various forms of public finances such as the budget, taxation and 
customs duties. Its orientation is thus to the various economic, legal and institutional topics that are important for the sound long-term economic develop-
ment of the Republic of Croatia. So that the public should be able to have a better insight into certain issues, the Institute of Public Finance is launching 
its Newsletter, in which it will  from time to time publish informed and independent analysis of economic questions.  The views expressed in the articles 
published in the Newsletter will reflect the opinions of the authors, which do not necessarily coincide with those of the Institute as institution. Full text 
of Newsletter is also available on Institute’s Web site: http://www.ijf.hr/newsletter.
No. 39 May 2009
1
Inst itute of Publ ic Finance • HR-10000 Zagreb, Smičik lasova 21, Croat ia
Katarina Ott
Recession in South East Europe:  
Is there some space for policy manoeuvre?
1  For the purpose of the text SEE countries include Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania, and Serbia. 
2 All data in the text if not expressly mentioned otherwise are from EBRD (2008).
The majority of countries in South East Europe (SEE)1 
have been living above their means, neglecting the ne-
cessity for fiscal consolidation, lagging behind in insti-
tutional reforms and now, in the recession, they cannot 
afford fiscal stimulus. Unfortunately, these countries do 
have to engage in fiscal retrenchment. This text tries to 
investigate the possible space for policy manoeuvre. It 
argues for more cautious monetary policy, elaborates the 
challenges of fiscal policy and gives some recommen-
dations for one of the countries – Croatia – hoping that 
some of the suggestions might be found of relevance in 
some other SEE countries. 
Living above their means
As stated for Croatia many times already (e. g. Ott, 2009), 
the majority of SEE countries are confronted with prob-
lems that they should have tackled a long time ago as 
they have been living above their means for too long and 
now they have to pay international and domestic bills 
that are becoming more and more expensive. This can 
easily be supported by the following considerations:
The estimate for the average general government ex-•	
penditures across the region in 2007 was 40% GDP 
(ranging from 48% in Croatia and 45% in Macedonia 
to 29% in Albania);
Estimated regional budgetary deficit for 2008 was •	
1.5% GDP (from 3.7% surplus in Bulgaria to 5.2% defi-
cit in Albania);
It is not strange that the average public debt in the re-•	
gion in 2008 was 31% GDP (the highest was 54% in 
Albania and the lowest 14% in Bulgaria);
However, the average external debt in the region for •	
2007 was 42% GDP (105% in Bulgaria and 89% in 
Croatia as against 18% in Montenegro and 26% in 
Albania).2
Neglecting fiscal consolidation
Unfortunately, in the times of prosperity, while GDP 
growth was favourable – averaging for the region 5.7% 
per year in the period 2001-2007 – the general govern-
ment expenditure share of GDP across the region decrea-
Recession in South East Europe: 
Is there some space for policy manoeuvre?
2
3  EBRD transition indicators show countries’ positions on the transition path and enable cross-country comparisons. The indicators are in a range from little 
or no progress in transition (indicator 1) to standards equivalent to those of a hypothetical advanced market economy (indicator 4 plus).
sed less than one percentage point on average. These 
shares even increased 5 percentage points in Montene-
gro and 4.4 percentage points in Serbia. Although there 
are exceptions – such as Macedonia where the expendi-
ture share of GDP decreased 6 percentage points – it is 
obvious that the majority of SEE governments were not 
concentrated enough on fiscal consolidation, on decreas-
ing public expenditures and on carrying out the neces-
sary institutional reforms. 
Lagging behind in institutional reforms
The EBRD (2008) nicely explains the pace of institution-
al reforms in SEE countries. Average transition scores 
within the region vary: Bulgaria, Croatia and Romania 
scoring around 3.5, Albania and Macedonia around 3, 
and Bosnia and Herzegovina, Montenegro and Serbia 
around 2.8.3 Particularly indicative is that all SEE coun-
tries score rather poorly in governance and enterprise re-
structuring (only Croatia scoring 3, all others scoring 
from 2 to minus 3).
Now, in the worst possible circumstances countries have to 
Improve competitiveness•	  in which they all score poor-
ly (only Croatia and Romania scoring a meagre minus 
3, all others scoring around 2);
Decrease budget deficits•	  – the 2008 regional average 
budgetary deficit was equivalent to »only« 1.5% of 
GDP. However, the budgetary deficit was 5.2% in Al-
bania, 2.8% in Romania and 2.5% in Serbia, while only 
Bulgaria and Montenegro had budgetary surpluses; 
Decrease current account deficits•	  – the 2008 region-
al average current account deficit was equivalent to 
17% of GDP, ranging from 37% in Montenegro to 9.7% 
in Macedonia. None of the SEE countries had current 
account surpluses in that year, or in the ten previous 
years (and probably even longer);
Accumulate funds to re•	 pay their debts. 
Fiscal retrenchment instead of fiscal 
stimulus 
Obviously there is no place for fiscal stimulus or for dis-
cussions about what the USA and Germany are doing at 
the moment. The majority of SEE countries are con-
strained with current account deficits, high indebted-
ness, unbalanced budgets and some of them with unfa-
vourable demographic prospects. Acquiring funding 
abroad is difficult and expensive because of poor fiscal 
situation which is affecting their credit ratings. Further-
more, like many other emerging market economies, SEE 
countries suffer from »original sin«, i.e. they are not de-
veloped enough to be able to borrow abroad in their own 
currencies. 
With high government expenditures SEE countries need 
fiscal retrenchment.
When necessary governments could or even should sup-
port the banks, but supporting companies and industries 
in these circumstances might be very tricky:
Nobody knows how long this recession might last and •	
how much any possible fiscal stimulus might cost SEE-
country taxpayers.
Is the recession really the source of the problems of •	
these companies or are some of them doomed to fail 
anyway?
Lobbying, corruption and nepotism are already pro-•	
nounced in the region and fiscal stimulus might bring 
additional injustices and inefficiencies, a surge of cor-
ruption, as well as protectionism in neighbouring coun-
tries. 
Thinking about Croatian tourism for example, nobody 
knows how many tourists will not come to Croatia be-
cause of the recession and how many because of inade-
quate services and high prices. Why should the Croatian 
tourist sector try to be more productive and more effi-
cient than for instance the Greek tourist sector if Croatian 
taxpayers are willing to pay for the difference in prices 
caused by this sector’s low productivity and inefficien-
cies? 
Policy space: Does it exist?
A draft document prepared by the OECD for a recent 
meeting of the SEE Investment Committee (---, 2009) 
enumerates various possible and actual measures that 
could be, and in some cases have been, undertaken by 
SEE countries. When it comes to the currency depreci-
ation it concludes that »however, for some countries de-
preciation is not an option because their currencies are 
pegged to the euro«. One can only agree with that state-
ment. It is true that all SEE countries have to improve 
competitiveness; however when countries have low ef-
ficiency and poor product iveness their competitiveness 
cannot be remedied by currency depreciation, irrespec-
tive of whether it is pegged to the euro or not. Besides, 
Recession in South East Europe: 
Is there some space for policy manoeuvre?
3
4  Nacrt prijedloga zakona o osnovici plaće u javnim službama s nacrtom konačnog prijedloga zakona, March 2009. http://www.vlada.hr/hr/naslovnica/
sjednice_i_odluke_vlade_rh/2009/74_sjednica_vlade_republike_hrvatske 
currency depreciation can invoke protectionism in other 
countries and cause problems with repayment of loans 
denominated in foreign currency. In the end, deprecia-
tion could provoke inflation and further destabilize frag-
ile economies. Competitiveness could be improved 
through enabling conditions for more open trade and in-
vestment and for increasing efficiency and productive-
ness. Measures could involve more flexible labour laws, 
more flexible working hours, and in some countries a 
better basic infrastructure. 
Time for a more cautious monetary 
policy
As reviewed in the aforementioned OECD draft docu-
ment, among the possible monetary measures that could 
be contemplated – or have been implemented in some 
SEE countries – are the following:
»Measures to increase liquidity and boost credit to •	
households and firms, such as cutting main policy rates 
or reducing minimum reserve requirements«. Increas-
ing liquidity and improving the structure of the debt 
are certainly good measures. However, having in mind 
the already high indebtedness, one should be careful 
and think of the optimal level of indebtedness too. 
»Measures to encourage lending in local currency«. •	
The same as above; it is good to improve the structure 
of the debt. However, although it might seem that, in 
view of the level of development and total indebted-
ness, particularly of the private sector, these countries 
did not step over the optimal level of indebtedness, they 
should still carefully watch the optimal level of their 
indebtedness. 
»Measures to prevent potential bank runs, like increas-•	
ing guaranteed sums or scrapping taxes on savings«. 
Countries have to have stable banking systems and 
measures aimed at stabilizing banking systems could 
be considered a horizontal aid that benefits everybody. 
In that sense scrapping taxes on savings are welcome, 
while increasing guaranteed sums could be tricky. In 
countries with poor confidence in banks, increased 
guarantees might improve trust. However, they might 
also increase moral hazard. 
»More cautious monetary policy« is certainly the best •	
advice possible in these times, particularly in coun-
tries in which there are big pressures to depreciate the 
local currency. 
Challenges of fiscal policy
When it comes to fiscal policy, the same OECD document 
emphasizes the limited room for fiscal manoeuvre for 
more or less the same reasons as stated above and again 
enumerates possible and actually undertaken measures.
Certainly the best measure is, as the document states, to 
»increase spending efficiency by e.g. cutting public ad-
ministration costs, urging state-owned enterprises to de-
vise saving plans or reducing the rate of public sector 
wage increases and pensions«. However, weak, usually 
coalition, governments tend to be blackmailed by users 
of public funds. At the same time, public sector salaries 
and social benefits – which in the majority of SEE coun-
tries comprise the biggest share of expenditures – are 
presented as mandatory budgetary items, which is actu-
ally not true. Only debt payments are mandatory items 
and even they could be postponed, although it would not 
be wise to suggest that at the moment. Increases in pub-
lic sector salaries and social benefits are the consequence 
of long-term pressures from trade unions, pensioners and 
other users, and in some of these countries also of war 
veterans. As these agreements were made and decisions 
and laws were passed, so new agreements could be made 
and new laws passed. But just as these agreements and 
decisions were made and laws were passed, so new 
agreements and laws could be put in place in their stead. 
Even without agreements, governments could pass new 
laws, as the government of Ireland did recently when it 
could not reach consensus for fiscal consolidation with 
trade unions and employers. 
And when governments decide to cut public servants’ 
salaries (for example) it is wrong to promise an automat-
ic increase of salaries when the economy recovers, to 
guarantee jobs in the public sector and to decrease sala-
ries by an equal percentage for everybody, as in that case, 
sooner or later, countries will find themselves in the 
same situation again. Unfortunately, the new proposal 
of the law on public sector salaries in Croatia4 promises 
exactly that: keeping jobs and full employment, for at 
least two years and it is obvious that salaries will be de-
creased proportionally. 
Some SEE countries like Macedonia and Montenegro 
are giving tax breaks and capital investment tax expen-
ditures to some industries like construction. Unfortu-
nately, such selective preferential treatments might fur-
ther increase distortions and inefficiencies and deepen 
budgetary imbalance. Some countries, like Serbia, have 
Recession in South East Europe: 
Is there some space for policy manoeuvre?
4
introduced temporary new property, luxury items and 
capital gains taxes. This kind of populist, marginal tax 
cannot substantially increase budget revenues. When 
governments decide to increase taxation the best way is 
to increase the standard VAT rate and, where they are 
present, replace the zero rates with the reduced VAT 
rates. The latter, for countries that are aligning their tax 
systems with the EU requirements, is a necessary move 
anyway. VAT is the highest yielding, simplest, most neu-
tral, the least expensive-to-collect kind of taxation and 
is most appropriate for the necessary adjustments. Al-
though one should always argue for the lowest possible 
taxation, when governments do not have the guts to de-
crease expenditures, increasing VAT seems like the best 
idea. Revenues and expenditures have to be balanced and 
times of scarce and expensive capital are not opportune 
for incurring new debts. According to Mihaljek (2009) 
the risk premium on external borrowing for the govern-
ment of Croatia has increased five times since mid 2008 
and twenty times since mid 2007.
In describing current policy responses, the OECD draft 
paper notes that »Some SEE countries are additionally 
funding state-owned development banks to facilitate 
lending to small and medium size enterprises, some even 
directing funds to specific industries or export oriented 
sectors«. It should be observed that the sources for these 
funds are questionable, with already overstretched budg-
ets, and that such measures could cause further distor-
tions, inefficiencies and increase corruption. For the same 
reasons it does not seem wise to subsidize interest rates 
on loans to firms and on credits to households (e.g. in Ser-
bia which already has external debt of around 65%).
»Some countries are increasing assistance to the poor-
est income groups... as lower income groups typically 
have a higher propensity to consume«. It is true that 
countries should support the poorest and carefully tar-
get the neediest. If overlooked, social aspects of the re-
cession might in some of the countries cause unrest 
which would destabilize these countries and adversely 
affect not only political but also the economic situation, 
e.g. causing a further decrease of foreign direct invest-
ments. However, the competencies of these countries’ 
administrations and necessary data-bases for targeting 
this kind of assistance might be questionable. 
Can recommendations meant for 
Croatia ring true for other countries  
of South East Europe?
As it would seem preposterous to give unique sugges-
tions to all countries across the region, the rest of this 
text will make basic recommendations for the country 
the author is best acquainted with, in the hope that they 
might be found of relevance for some other countries as 
well. 
The situation in Croatia is more similar to that in other 
SEE countries than many Croats are aware or would like 
to admit. The main problems in Croatia lay in high pub-
lic expenditures, high budget deficit, a high current ac-
count deficit, high public debt, high external debt, high 
unemployment and poor demographic prospects. The 
necessary steps to remedy these problems – cutting pub-
lic expenditures and carrying out institutional reforms 
i.e. reforming public administration, health, pension and 
welfare systems – despite of or even because of the re-
cession are obvious. 
In a short run, as soon as possible, Croatia should de-
crease its public expenditures, targeting the most bur-
densome public sector salaries and social benefits that 
make up 70% of total government expenditures, but also 
state aid and local government borrowing. If government 
cannot make such tough decisions it should as soon as 
possible increase the standard VAT rate and replace the 
zero rates with reduced VAT rates. Incurring further 
debts at extremely high prices is highly irresponsible to 
the new shrinking generations of further taxpayers. 
In the long run, the government should concentrate on 
structural reforms in employing, laying off and reward-
ing public sector employees plus reforms of welfare, 
health, education, pensions, state aid, and local and re-
gional administrations. Government should also better 
plan its finances, stop running them on a daily basis and 
stop accommodating to the pressures of various interest 
groups. 
Short term decreases of public expenditure will not suf-
fice without long-term reforms.
Literature
---, 2009. The Global Financial Crisis: Preliminary Ev-
idence in South East Europe and Responses from Gov-
ernments. Paris: OECD-SEE Investment Committee, 
Draft Document for Discussion, 7 April 2009.
EBRD, 2008. EBRD Transition Report 2008: Growth in 
Transition. London: The European Bank for Recon-
struction and Development.
Mihaljek, D., 2009. »The financial turmoil in Central 
and Eastern Europe and fiscal policy in Croatia«. IPF 
Newsletter, No. 40 (forthcoming).
Nacrt prijedloga Zakona o osnovici plaće u javnim 
službama s nacrtom konačnog prijedloga zakona, 
Recession in South East Europe: 
Is there some space for policy manoeuvre?
5
March 2009. Available from: [http://www.vlada.hr/hr/
naslovnica/sjednice_i_odluke_vlade_rh/2009/74_sjed-
nica_vlade_republike_hrvatske]. 
Ott, K., 2009. »Fiscal destimulation instead of fiscal 
stimulation« [online]. IPF Press Release. Available 
from: [http://www.ijf.hr/eng/releases/9.pdf].
Institut za javne financije
Smičiklasova 21
Zagreb, Hrvatska
p.p. 320
Institute of Public Finance
Smičiklasova 21
Zagreb, Croatia
PO Box 320
Poštarina plaćena  
u poštanskom uredu 
10000 ZAGREB
TISKANICA


Newsletter no. 39. Recession in South East Europe: Is there some space for policy manoeuvre?

Casal B\ue9rtoa, Fernando

Party system institutionalization and the quality of democracy in eastern Europe

  
 
1 
 
 
The International Institute for Middle-East and Balkan Studies (IFIMES) in 
Ljubljana, Slovenia, regularly analyses events in the Middle East and the Balkans. In 
view of the upcoming elections to the European Parliament (EP) which are to take 
place on 7 June 2009, IFIMES has carried out an in depth opinion poll. The most 
relevant and interesting sections from the comprehensive public opinion poll entitled 
“No Favourites” are published below.   
 
 
2009 EP ELECTIONS IN SLOVENIA: 
 
NO FAVOURITES 
 
 
12 CANDIDATE LISTS TO COMPETE AT EP ELECTIONS 
 
The second elections for the European Parliament (EP) in Slovenia will be held on 7 
June 2009. The elections are based on a proportional electoral system with 
preferential voting in which the entire country constitutes a single electoral 
constituency. 
 
There are 1,703,521 eligible voters and 81 candidates from among which seven MEPs 
will be elected. 
 
The following candidate lists will compete at the elections: ● Social Democrats (SD) ● 
Slovenian Democratic Party (SDS) ● ZARES — New Policy ● Christian Socialists of 
Slovenia (KSS) ● Liberal Democracy of Slovenia (LDS)● Democratic Party of 
Pensioners of Slovenia (DeSUS) ● Slovenian People’s Party (SLS) ● Youth Party of 
Slovenia (SMS) ● Slovenian National Party (SNS) ● New Slovenia (NSi) ● 
Independent list for the rights of patients (NLPB) ● United Greens (ZZ) 
 
 
PUBLIC OPINION POLL: 
 
The IFIMES International Institute has conducted a public opinion poll in the form 
of in-depth interviews of respondents in the territory of the Republic of Slovenia. The 
poll was carried out during the period from 20 April to 7 May 2009. We used the 
random three-stage sample of 799 respondents who are the citizens of the Republic of 
Slovenia in the single electoral constituency according to the proportional system. 
387 randomly selected respondents refused to participate in the poll and 201 did not 
meet the sample rules.  The gender, age, social and educational structure of 
respondents meets the sample rules. There is a substantial balance between the 
  
 
2 
respondents from urban and non-urban environments. Heads of candidate lists are 
presumed on the basis of informal announcements published by political parties.  
The answers to the most relevant and interesting questions are presented below:  
 
1. DO YOU FOLLOW THE WORK OF EUROPEAN INSTITUTIONS? 
- YES                  44,3% 
- NO                    55,7% 
 
 
0
10
20
30
40
50
60
YES
NO
 
 
2. DO YOU THINK YOU ARE SUFFICIENTLY INFORMED ABOUT THE 
WORK OF SLOVENIAN MEPs? 
- YES                             41,5% 
- NO                              39,2% 
- I DON’T KNOW        19,3% 
 
0
10
20
30
40
50
YES
NO
I DON'T KNOW
 
 
3. HOW WOULD YOU EVALUATE THE WORK CARRIED OUT BY 
SLOVENIAN MEPs SO FAR? 
- EXCELLENT                   15,4% 
- VERY GOOD                   18,6% 
- GOOD                               33,7%    
  
 
3 
- SUFFICIENT                        13,4% 
- INSUFFICIENT                     9,2% 
- NO OPINION                         4,8% 
- I DON’T KNOW                     4,9% 
 
0
5
10
15
20
25
30
35
EXCELLENT
VERY GOOD
GOOD
SUFFICIENT
INSUFFICIENT
NO OPINION
I DON'T KNOW
 
 
4. DO YOU THINK THE EUROPEAN PARLIAMENT WILL HAVE 
AN EVEN MORE IMPORTANT ROLE IN THE NEXT TERM OF OFFICE? 
- YES                                62,6% 
- NO                                 32,8% 
- NO OPINION                 4,6% 
 
 
0
10
20
30
40
50
60
70
YES
NO
NO OPINION 
 
 
5. IN OPTING FOR SLOVENIAN MEPs, IS IN YOUR OPINION 
STRESS LAID ON INDIVIDUAL CANDIDATE OR ADHERENCE TO THE 
POLITICAL PARTY SUPPORTING THAT CANDIDATE? 
- INDIVIDUAL                                                                  54,5% 
- POLITICAL PARTY                                                       18,0% 
- BOTH INDIVIDUAL AND POLITICAL PARTY       22,6% 
-                 I DON’T KNOW                                                                4,9% 
  
 
4 
0
10
20
30
40
50
60
INDIVIDUAL
POLITICAL PARTY
INDIV. AND POL. PARTY
I DON'T KNOW
 
6. HOW IMPORTANT DO YOU FIND ADVOCATING NATIONAL 
INTERESTS BY SLOVENIAN MEPs? 
- VERY IMPORTANT        65,7% 
- IMPORTANT                   22,3% 
- UNIMPORTANT               4,7% 
-                 I DON’T KNOW                 7,3% 
 
 
0
10
20
30
40
50
60
70
VERY IMPORTANT
IMPORTANT
UNIMPORTANT
I DON'T KNOW
 
 
7. WOULD YOU SUPPORT THE RE-ELECTION OF DR. JANEZ 
POTOČNIK AS EUROPEAN COMMISSIONER ON THE BASIS OF HIS 
WORK TO DATE? 
- YES                                 72,1% 
- NO                                  16,7% 
- NO OPINION                 4,8% 
- I DON’T KNOW             6,4% 
 
 
  
 
5 
0
20
40
60
80
YES
NO
NO OPINION
I DON'T KNOW
 
 
8. WHICH OF THE MAIN REPRESENTATIVES OF SLOVENIA AT 
HOME AND ABROAD DO YOU TRUST MOST? 
- DANILO TÜRK            28,7% 
- PAVEL GANTAR         15,6% 
- BORUT PAHOR          20,4% 
- JANEZ POTOČNIK     30,1% 
- OTHER                            5,2% 
0
5
10
15
20
25
30
35
DANILO TURK
PAVEL GANTAR
BORUT PAHOR
JANEZ POTOČNIK
OTHER
 
NOTE: 
The opinion poll only included the representatives on the leading positions in the 
state. In addition to the above such function is also performed by President of the 
National Council and Chairman of the Constitutional Court. 
 
9. WHICH HEAD OF THE CANDIDATE LIST FOR SLOVENIAN 
MEPs DO YOU TRUST MOST? 
- ALOJZ PETERLE       (NSi)        9,6% 
- JELKO KACIN            (LDS)     10,1% 
- MILAN ZVER             (SDS)        9,2% 
- ZORAN THALER       (SD)          8,8% 
- IVAN ŽAGAR             (SLS)         2,8% 
  
 
6 
- IVO VAJGL              (ZARES)      8,6% 
- KARL ERJAVEC      (DeSUS)      2,4% 
- NONE                                           39,6% 
- OTHER                                          8,9% 
 
0
5
10
15
20
25
30
35
40 ALOJZ PETERLE
JELKO KACIN
MILAN ZVER
ZORAN THALER
IVAN ŽAGAR
IVO VAJGL
KARL ERJAVEC
NONE
OTHER
NOTE: 
The opinion poll does not include Zmago Jelinčič Plemeniti  as the possible head of 
the Slovenian National Party’s (SNS) list. There is a difference in the ratio between 
the candidate list heads and the ratio between political parties. 
 
10. HOW IMPORTANT DO YOU THINK PREFERENTIAL VOTES 
ARE FOR EP ELECTIONS? 
- VERY IMPORTANT       24,6% 
- IMPORTANT                  54,4% 
- UNIMPORTANT            12,6% 
- I DON’T KNOW               8,4% 
 
0
10
20
30
40
50
60
VERY IMPORTANT
IMPORTANT
UNIMPORTANT
I DON'T KNOW
 
11. DO YOU AGREE THAT WEST BALKAN STATES SHOULD JOIN 
EU AS SOON AS POSSIBLE? 
- YES                      67,3% 
- NO                       22,5% 
  
 
7 
- I DON’T KNOW       10,2% 
 
0
20
40
60
80
YES
NO
NO OPINION
I DON'S KNOW
 
 
12.  DO YOU SUPPORT THE EFFORTS OF SLOVENIAN 
GOVERNMENT TO RESOLVE THE BORDER ISSUE WITH CROATIA? 
- YES                          78,1% 
- NO                            18,5% 
- I DON’T KNOW       3,4% 
 
0
20
40
60
80
YES
NO
I DON'T KNOW
 
 
13. WHICH IS YOUR FAVOURITE NEIGHBOURING COUNTRY? 
- CROATIA                11,7%  
- ITALY                      23,4% 
- AUSTRIA                32,3% 
- HUNGARY             22,6% 
-                 NONE                      10,0% 
 
  
 
8 
0
5
10
15
20
25
30
35
CROATIA
ITALY
AUSTRIA
HUNGARY
NONE
 
 
Analysts have established that there are no favourites for Slovenian elections to the 
European Parliament and that the heads of candidate lists play an important role. As 
much as 39.6 % of voters have expressed no trust for any of the candidates, which 
means that during the election campaign the division of political support may still 
change in comparison with that established in this public opinion poll. 
 
Ljubljana, 15 May 2009                                   
                                                                              International Institute for Middle East  
                                                                                 and Balkan Studies (IFIMES) - Ljubljana                                                             
             Directors:    
                                                                 
                                                                               Bakhtyar Aljaf  
                                                                              Zijad Bećirović, M.Sc. 
    


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