The Impact of the Global Financial Crisis on European Transition Countries

In spite of a large number of studies on the international transmission of crises, research is still unable to quantify the determinants of severity of crisis across countries. This thesis contributes to knowledge in this area by investigating the impact of the Global Financial Crisis (GFC) on European transition countries. In analysing the transmission of the GFC to these countries and the nature and severity of the spillovers, both trade and financial channels are examined and particular emphasis is placed on the degree of euroisation, integration with the EU, remittances, bank ownership and foreign credit flows.
This thesis firstly provides a critical review of the existing literature on the transmission of the GFC to European transition countries and identifies gaps in knowledge, which are then addressed through empirical investigations. The first empirical investigation explores how GDP and financial shocks in the European advanced countries (EU15) are transmitted to European transition countries, using the recently-developed global vector auto-regression (GVAR) approach. The results suggest that while trade appears to be the strongest linkage between EU15 and European transition countries, the shocks are propagated by both trade and financial channels. Moreover, although the estimated spillovers from GDP and financial shocks in the EU15 to European transition countries are always negative, there are considerable heterogeneities in the size and statistical significance of these effects across regions. The Baltic countries display the most severe impact from the shocks in the EU15, which appear to be propagated mostly through the financial channel: foreign credit flows; FDI; and remittances. The Balkan countries are affected predominantly through exports, FDI and foreign credit flows. The other Central and Eastern European transition countries are less severely affected by shocks to the EU15 GDP. Furthermore, highly euroised, non-EU members and more open transition countries appear to be more severely affected by the shocks in the EU15.
The initial analysis is extended through a firm-level analysis, which investigates whether initial conditions (from 2007) had an impact on firms' sales during the GFC in 2009. The major finding of this firm-level study is the importance of the financial channel in the transmission of the GFC to European transition countries: a higher share of working capital financed by banks, a higher share of foreign currency loans and a higher share of foreign bank ownership each increased the impact of the GFC on the firms operating in these countries. With regards to the export channel, it is found that both exporting and non-exporting firms operating in the countries covered in this study were significantly affected by the crisis. This finding suggests that, although there is a trade channel, the exporting firms are able to cope with the crisis better than non-exporting firms due to their overall superior performance. This finding may also reflect the cross-sectional nature of the data which can reveal only between-firm differences. So exports, or more precisely, exporting firms constitute a transmission channel of the GFC. Yet, exporting firms are also more able to offset effects of crisis and thus contribute to the resilience of transitional economies.