The recent agreement by European leaders to top up funds held by the International Monetary Fund should be welcomed by anyone who has an interest in the economies of emerging markets, and particularly Central and Eastern Europe.


Leaders of France, Germany, UK and Italy agreed to double the International Monetary Fund’s emergency rescue fund to US$500bn.


Countries of Central and Eastern Europe appear particularly vulnerable, with Ukraine, Hungary and Latvia having already asked the IMF for help and Romania reported to be in talks over a bailout. Latvia’s government collapsed last week.


For years, rising wages and consistent economic growth have seen Eastern Europe held up as a growth region for manufacturers and consumer goods companies.


Now, the party looks to be over. European Commission figures on prospective gross domestic product declines across the Central and Eastern European countries that joined the EU in 2004 and 2007 are plain ugly.

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Declines or more than 5% in 2009 are expected in Poland, Lithuania, Estonia, Latvia, Hungary and Slovakia, with a decline of more than 10% predicted for Romania and more than 15% in Bulgaria. Czech Republic is set to escape relatively lightly, the Commission believes, with a 2% decline in GDP.


One of the main reasons is that banks and investors are pulling their money out of emerging markets. Jean-Claude Trichet, head of the European Central Bank, has warned of a fall in credit in Europe, and particuarly among those outside the euro currency zone.
 
The United Nations reported in January that foreign direct investment fell by 21% worldwide in 2008, to US$1.4tn, and is likely to fall further in 2009.


Signs of a flight of investment from emerging market economies should not come as a great surprise. Historical precedents can be taken from the 1929 Wall Street Crash, which, like it or not, this current crisis increasingly resembles.


Take Germany in the immediate aftermath of 1929, for example. Cash-strapped investment houses in the US pulled considerable loans out of the fledgling German Republic. German Chancellor Gustav Streseman, who incidentally died in 1929, spent much of his six years in office neogiating foreign investment loans to help rebuild his inflation-ridden and war weary country, but in the space of months, the US stock market collapse undid this work and exposed Germany’s economic frailty.


Of course, we all know what happened politically with Germany in the 1930s, and this article does not suggest that we are looking at a similar situation in Eastern Europe. There are support structures in place and the IMF cash will help. But the Economist Intelligence Unit has just warned that the severity of this recession and the pressures it creates could roll back democracy in some parts of the world. It’s not something to compeletely discount as governments come under pressure and unemployment climbs.


One thing’s for sure: the global economic downturn is uncovering economic weaknesses and exposure to foreign money around the world. It could be a weakness that hits home particulary hard in Central and Eastern Europe and on those who do business there.