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Poland is the winner among 24 EU countries in a ranking based on the stability and growth of five indicators (production, productivity, employment, labour market performance and exports) between 2008 and 2011. E.g. Polish business sector output and employment hardly declined during the crisis and by the end of 2011 they were 14% and 3% higher respectively than in early 2008 (All indicators consider the business sector without construction, real estate activities and agriculture, in order to exclude public sector developments and construction, which was doing like crazy in some countries).

On the other hand, among the Central European countries Latvia and Estonia rank poorly at the 21st and 22nd position. Their business sector output declined by about 20-25% and despite rapid economic growth since late 2009, output and employment are still about 10% below the 2008 level.

Other Central European EU members rank in between, with the Czech Republic, Slovakia and Lithuania at the still respectable 6th, 9th and 11th places, respectively. They are followed by Romania (16th), Bulgaria (17th), Hungary (18th) and Slovenia (20th).

What could explain these diverse reactions to the global financial and economic crisis? One obvious answer is the differences in pre-crisis build-up of vulnerabilities. External imbalances in the Baltic countries, Bulgaria and Romania were larger, the reliance on external credit (instead of foreign direct investment) was higher, domestic credit growth and housing price increase was faster than e.g. in Poland, the Czech Republic or Slovakia. It is therefore not surprising that more vulnerable countries were hit harder. But economic policy may also have played a role.

Poland adopted a significant fiscal stimulus in 2009 and 2010, which has likely helped the economy. The role of exports in the Polish economy was sizeable in 2008 (about 45% of GDP), but not as high as in e.g. Hungary (80%) and therefore the fall in external demand could have had a smaller negative impact in Poland. Exporters were also helped by the very significant depreciation of the Polish zloty, though it hurt foreign currency borrowers, as about 30% of loans were granted in foreign currencies.

Poland also significantly outperformed Sweden (ranked at 8th place), even though Sweden also implemented a fiscal stimulus (even larger than Poland), experienced the depreciation of the Swedish krona (though less than in Poland), and the export share to GDP is almost the same as in Poland. Furthermore, labour markets are equally protected in Poland and in Sweden according to the OECD and hence labour market flexibility cannot explain the differences. The Polish economy did something really extraordinary in response to the crisis.

The depressing economic contractions in Estonia and Latvia could, in addition to pre-crisis vulnerabilities, be related to the difficulties in the so called “internal adjustment” of the real exchange rate, i.e. productivity improvements and wage cuts to restore price competitiveness, when depreciation of the nominal exchange rate is not available. Private sector wages have declined to some extent, but the wage falls have corrected just a small fraction of pre-crisis wage rises, they were accompanied by massive employment losses, and they were temporary and were largely or even fully reversed by the end of 2011 (see detailed charts for all 24 EU countries here).

In a December 2011 paper comparing Iceland, Ireland and Latvia I found that the policy mix of Iceland, which included devaluation, capital controls, bank defaults and reorganization, and fiscal consolidation led to the smallest fall in employment, despite the greatest shock to the financial system. Latvian authorities decided to keep the exchange rate peg, which has likely contributed to Latvia’s dramatic hit, which was harder than in any other country of the world. And Ireland, a euro-area member, also suffered heavily. Yet the recovery in Latvia also seems to be V-shaped, which is good news - but one has to add that after losing one quarter of GDP a fast recovery is not unexpected and the main challenge is medium term growth, as I already already argued both in 2009. Output and employment (even when considering the business sector excluding construction, real estate activities and agriculture) are still more than 10 percent below the pre-crisis peaks.

Zsolt Darvas is the author of Compositional effects on productivity, labour cost and export adjustments.

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