An Unlikely Decision: Factors Influencing Internal Devaluation in Response to the 2008-2010 Financial Crisis in Central and Eastern Europe
Snyder, Ilsa Katrina
Area of Honors:
Bachelor of Arts
Donna L Bahry, Thesis Supervisor James A Piazza, Honors Advisor
political science economics internal devaluation external devaluation Eastern Europe Latvia the Baltics financial crisis
Prior to the global financial crisis in 2008-2010, economists and politicians alike considered it virtually impossible for governments to pass and implement internal devaluation (ie severe austerity programs). When a number of Eastern European democracies proposed this policy response, they were warned that skyrocketing unemployment, an even deeper collapse of GDP and unruly unrest would ensue. Still, some governments elected to enact internal devaluation measures. This paper seeks to identify what factors influenced the decision making of governments in Central and Eastern Europe to internally devalue by adopting internal austerity measures. Nine countries across Central and Eastern Europe are studied between the years 2000 and 2011 to assess the impact of different currency regimes, changes in GDP and current account balances, partisanship, and political unrest on the likelihood of internal devaluation, as measured by the percent change in government expenditures. The results indicate that countries with pegged or managed float currencies and sharp changes in GDP and current account balances were most likely to enact internal devaluation. Partisanship and political unrest were not significant factors influencing the likelihood of internal devaluation measures. These results suggest that in Central and Eastern Europe, currency structure and economic instability, not political partisanship or public demonstrations, were the greatest influences on policy makers during the crisis.