Factors of the European Economies' Vulnerability to External Shocks - An Empirical Analysis. The Example of 2008-2009 Crisis Costs

The article analyses the factors determining the vulnerability of the European countries to external shocks taking the example of the global 2008-2009 economic slowdown (also called the subprime crisis2) and its impact on economies in Europe. The particular attention is attached to factors related to the fundamentals of the economy, i.e. the GDP growth, fiscal and monetary stability and external stability. Attempting to level of the gap existing in the Polish literature in the empirical research on that problem, the hereby article also refers to wider problems of the macroeconomic factors enhancing economies' capabilities to meet the challenges of global crises and strengthening their competitiveness afterwards. The special attention in the paper was attached to the role of financial and trade openness.

In the empirical study we have assessed the macroeconomic “outside” of the crisis in the European economies and then we have run the regression model process to estimate the factors determining the exposure to those costs in cross-country perspective. The above mentioned macroeconomic costs are the relative falls (“gaps”) in GDP, i.e. the difference between the hypothetical GDP (resulting from the average mid-term trend) in 2008-2009 and actual GDP incurred in those two “crisis years”. In the regression model (crisis costs as the explained variable) we used the chosen data and indicators denoting the potential factors of the European countries' exposure to 2007-2009 crisis shock as explanatory variables.

As the calculation results show, the variables that contributed to higher 2008-2009 crisis effects in the European countries were among others: high unemployment and high real interest rates, considerable government sector debt before the crisis, high economic development level, high share of nonperforming credit portfolio and high share of equity in the banking sector's assets (signifying a relatively poorly developed banking system), as well as good quality of law. Greater costs of the 2007-2009 crisis were (on average) incurred by countries experiencing high inflation, rapid GDP growth (as compared to the other sample countries), and considerable share of investment in GDP before crisis, and the economies which were characterized by above-average industry concentration and high development of stock exchange and bank market. The study leads to a general conclusion that in case of the European countries, the recession only highlighted and enhanced many problems and unfavorable tendencies which had existed before.