As the crisis gathers momentum and countries such as the UK, US and Germany announce stimulus packages amounting to 10% to 15% of GDP, the possibility has to be faced that central and southeastern Europe (CESEE) will need support of the same order. But who will pay for it?
In theory, the region is in good economic shape. GDP growth has averaged around 3.5% over the past three years. As a result, budget deficits have been mostly moderate and government debt-to-GDP ratios have been steadily declining – to below 50% in several cases.
At the start of the Covid-19 outbreak, that looked sufficient to cushion the impact of a few weeks of lockdown. That view now seems naïve, especially when it comes to the poorer European Union members such as Romania and Bulgaria and the accession states of the western Balkans.
None of these options seems likely to deliver the scale of support required to see emerging Europe through the crisis and into recovery
Many countries should still be able to raise a certain amount of emergency funding themselves. Most EU member states in the region have well-developed domestic government bond markets. The question is where demand would come from.
Foreign investors are heading the other way, spooked by dramatic interest rate cuts and a concomitant sell-off in even stronger currencies such as the zloty and Czech koruna.
The Romanian authorities have indicated that they would like to see local banks take up the slack. While politically appealing, that approach seems unlikely to work in CESEE.
For one thing, debt issued by non-eurozone EU members is not classed as risk free by the European Central Bank, which would pose problems for the western European groups that still dominate banking in the region.
Policymakers should also be wary of encumbering bank balance sheets at a time when they will be needed, first to provision for the inevitable wave of impairments and second to support the post-coronavirus recovery.
Poland is experimenting with quantitative easing, announcing a big programme of local government bond purchases. This is a bold move and, if successful, could be copied by other CESEE countries. It is uncharted territory for emerging markets, however, and risks being perceived by investors as a step towards debt monetization.
If local bond markets prove insufficient, governments could also look to the Eurobond market. With global interest rates at rock bottom, paper from solid CESEE sovereigns offering a bit of yield could prove appealing for both euro and dollar bond buyers.
The European Bank for Reconstruction and Development has also announced it is setting aside €1 billion for coronavirus-related expenditures.
None of these options, however, seems likely to deliver the scale of support required to see emerging Europe through the crisis and into recovery.
The obvious answer is a strong, coordinated approach with backing from the EU. On the ground, there is already talk of revamping the Vienna Initiative as a focus for international assistance and to help regional banks support their countries of operation.
Ideally, a disaster fund would be set up specifically for CESEE – but this may be complicated by politics on both sides.
The EU is already embroiled in an internal row over mutualizing the costs of Covid-19, whether via the European Stability Mechanism or jointly-issued coronabonds, and the populist policies and anti-EU rhetoric of many politicians in the region have not endeared them to their western neighbours in recent years.
But when the richest EU members are turning on the spending taps, it would be a travesty if emerging Europe is left behind. The bloc must not abandon its poorest members or its closest neighbours.