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The Impact of the Global Crisis on Neighbouring Countries of the EU

The global financial crisis that originated in the financial sector of developed economies and then hurt the real sector of those countries has now gradually spread to emerging and developing countries via several transmission channels with negative spillovers. Although it was initially the core of the financial sector that was the eye of the hurricane, in the case of a great many emerging and developing economies it has been the fall in global world trade rather than a shock to their domestic financial sector that has pushed them into downturn. The sharp drop in world trade at the end of 2008 has led to a fall in their exports, which has directly slowed down their economic growth. The macroeconomic policy responses to this negative external shock have depended, among other things, on whether the financial sector or the real economy has been affected first. Timing has also proved crucial to the effectiveness of the policy response.

While some emerging and developing countries have reacted rapidly to the new situation, easing monetary and fiscal policies in order to stimulate their domestic economies, others have been more cautious. The emerging, and in particular the developing economies, display a number of characteristics which make them particularly vulnerable to the difficult economic circumstances: a risk of fiscal unsustainability, relatively weak private sectors, high unemployment rates and weak automatic stabilisers, a shallow financial sector which hampered the rise of economic activity and thus welfare levels in the past, and a lack of buffers. It will be as difficult for them as for the developed economies to mitigate or even reverse the impact of the global crisis on their economies, and though they have a similar set of policy instruments at their disposal the challenges will be quite different.

This Occasional Paper reviews recent developments in the countries neighbouring the EU, in particular in the financial and monetary sector and in public finances. It contains three main parts. The first part analyses the financial cross-border exposure of the EU's neighbours and reflects on the vulnerabilities of and risks to their economies in view of the financial crisis and global economic slowdown. It uses a broad range of financial indicators for this comparison and also describes recently announced and/or implemented policies and other crisis response options. The second part is divided into two regional sections, dealing with the EU's southern and eastern neighbours respectively. Both sections look at the main areas of reform, such as macroeconomic developments, trade liberalisation and economic opening, business environment, governance, social development and poverty. They also compare the monetary, fiscal and financial measures taken by countries within each region in more depth. The third part contains country chapters, each of which gives an overview of the economy of one country. In addition to fiscal, financial and monetary issues, these chapters also contain countryspecific information on labour market developments and social indicators.

The main focus of this publication is on countries that are part of the European Neighbourhood Policy (ENP) framework. The ENP encompasses the EU’s immediate neighbours by land or sea, along the southern rim of the Mediterranean – Algeria, Egypt, Israel, Jordan, Lebanon, Libya, occupied Palestinian territory, Morocco, Syria and Tunisia – and the countries to the east of the EU which form the Commonwealth of Independent States – Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. Other countries analysed are Russia and the Gulf Cooperation Council (GCC) countries – Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait, Oman and Qatar. Relations between the EU and Russia are governed by a strategic partnership and those with the GCC countries by a cooperation agreement.

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№6(34), 2009