The Global Financial “Crisis Hits Home” in Europe and Central Asia

December 2, 2009

WASHINGTON, December 2, 2009— The global financial crisis is having a devastating impact on families in emerging Europe and Central Asia, with the risk of the region giving back a fifth of the poverty reduction gains of the past decade, according to a new World Bank report.  By 2010, there could be over 10 million more poor people in the region, and close to an additional 25 million more who were almost middle class but now just above the poverty line (relative to pre-crisis projections) with the potential of losing their homes, jobs, and basic services.

The new report, The Crisis Hits Home – Stress-Testing Households in Europe and Central Asia, takes a unique look at the impacts of the global financial crisis at the household level in this region.  According to the report, families are being hit by credit market shocks, the increasing prices of goods and services, and rising unemployment.

“The global financial crisis risks reversing the substantial gains and improvements in living standards achieved by the Europe and Central Asia region over the last few years,” said Luca Barbone, Director for Poverty Reduction and Economic Management in the World Bank’s Europe and Central Asia Region.  “One of the tragic impacts of the crisis has been that the middle income countries that had turned the corner are the ones hardest hit.  Across countries in the region, unemployment levels have risen while economic activities have collapsed. Poverty will rise. Families are being stretched to the limit.”

Credit market shocks
The report says that stress tests recently conducted by the World Bank on household loans show that ongoing macroeconomic shocks to interest rates, exchange rates, and household income may increase the numbers of families that are unable to pay back their debt.  For example, up to 20 percent more families with mortgages and other loans in Lithuania and Hungary could be at risk of defaulting on their loans.

Price shocks
The food and fuel crisis may not be over.  International commodity price levels have not returned to pre-2007 levels. In addition, falling currencies in some countries are resulting in a new round of price increases. Because food represents a very large share of the poor’s total consumption – in some of the low-income countries of Europe and Central Asia, the food share of consumption among the poor is 70 to 80 percent – the poorest consumers will again be vulnerable.

In addition, in a number of countries, such as Belarus, Moldova, and Ukraine, the utility reform program remains largely incomplete. As a result, a number of countries will have to adjust their energy tariffs to cost-recovery levels in the coming years.

Employment and income shocks
Over the recovery period following the 1998 Russian crisis through 2006, more than 50 million people moved out of poverty in the region.  However, the poverty impact of the crisis will be enormous.  The rapidly deteriorating global economic environment is eroding the region’s substantial gains and, given the increased poverty projections, is threatening the welfare of a total of about 160 million people – close to 40 million people who are poor and about 120 million people who are just above the poverty line.  According to the report, it is the middle-income Commonwealth of Independent (CIS) countries that have seen the largest and most significant downward revisions to their gross domestic product growth projections.

Coping with the crisis
According to the report, lessons from the region’s own experiences with previous crises suggest that temporary economic shocks have a lasting impact on human development, as families cut back their education and health investments in response to a banking or exchange rate crisis.  Compared to past crises, the scope for households in Europe and Central Asia to fall back on their traditional coping strategies – from secondary employment and money transfers from friends and family to working abroad – is much more limited.  

Against this background, social safety nets will play a crucial role and should be protected even though revenues are expected to fall.  Indeed, protecting these programs – and possibly expanding the well-performing ones where some reallocation of resources is possible – is critical to helping families deal with the crisis.

 According to Barbone, Governments need to focus on ‘smart’ spending to protect their poor. Safety nets – cash transfers, social pensions, and targeted anti-poverty programs – will be among those items likely to be cut as revenues fall, but it is precisely these programs that are needed more now than ever before.”

The region’s social protection systems currently vary in size and targeting performance across countries. However, according to the report, most countries in the region have at least one targeted safety net program that can possibly be scaled up in response to the crisis by increasing the value of benefits they provide or by expanding their coverage to reach those households still currently outside the system.

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