Trouble around the other periphery

Economist
November 29, 2011

The wires are atwitter with a striking statement made by Poland's foreign minister, Radek Sikorski, in a speech given yesterday:

I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.

As remarkable as the above line is from an historical standpoint, it's easily understandable. Poland's economy is closely linked to the euro zone and it trades heavily with Germany. A collapse in the euro zone would drag much of central Europe into a deep recession.

The urgency of Mr Sikorski's statement may be linked, however, to the very real financial pressure facing central European economies right now. As European banks look to shore up balance sheets and increase capital ratios, they are curtailing loans to emerging markets. Capital flight out of those markets is leading to tumbling currencies (see chart at right). While economies like Greece and Italy would love to have a currency that could drop, dropping valuations are much trickier for emerging markets to manage and can do serious damage.

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