Stephan, 2005). But given the collapse of output in the early stages of transition, emerging Europe witnessed a dramatic decline in saving rates. In part, this phenomenon may have also been an artifact of the rapid loss of confidence in the financial system and ensuing financial disintermediation. Since the reduction of investment activity did not mirror the decline in savings, these countries initially recorded high current account deficits. Gradually, however, the fruits of a successful implementation of macroeconomic stabilization programs took hold in many transition economies.

**Figure 2. Saving-Investment Balances in Europe**

<!-- Start of picture text --> EU15 countries EU10 countries<br>40 40<br>30 30<br>20 20<br>10 10<br>0 0<br>-10 -10<br>-20 -20<br>Gross national saving (in % of GDP) Gross national saving (in % of GDP)<br>Gross investment (in % of GDP) Gross investment (in % of GDP)<br>Current account balance (in % of GDP) Current account balance (in % of GDP)<br>EU candidate countries EU neighborhood countries<br>40 40<br>30 30<br>20 20<br>10 10<br>0 0<br>-10 -10<br>-20 -20<br>Gross national saving (in % of GDP) Gross national saving (in % of GDP)<br>Gross investment (in % of GDP) Gross investment (in % of GDP)<br>Current account balance (in % of GDP) Current account balance (in % of GDP)<br>1993 1996 1999 2000 2003 2006 2007 1994 1997 1999 2002 2004 2007<br>1996 1997 1998 1999 2000 2007 2008 1994 1996 1999 2001 2004 2006<br>1994 1995 1997 1998 2001 2002 2004 2005 2008 1993 1995 1996 1998 2000 2001 2003 2005 2006 2008<br>1993 1994 1995 2001 2002 2003 2004 2005 2006 1993 1995 1997 1998 2000 2002 2003 2005 2007 2008<br><!-- End of picture text --> Source: Authors’ calculations based on World Bank and IMF data (2011). Notes: Unweighted averages. The data is not presented if there is at least one missing country observation within a group.

The resumption of positive growth rates by the late 1990s was associated once again with a significant deterioration of current account positions and unprecedented inflows of private foreign savings. But was this the result of a substitution between national and foreign savings or the consequence of the existence of high investment opportunities? The evidence seems to suggest that in emerging Europe this second phase of increased dependence on foreign savings was not, for the most part, a case of savings substitution (Figure 2). On the contrary, it appears to have been targeted at exploiting attractive investment opportunities in a rapidly improving business environment. Indeed, investment in many cases adopted an upward trend and domestic savings either increased or remained stable. More precisely, classifying emerging Europe into the three political groups related to the European Union (EU10, EU candidate, and EU neighborhood countries) reveals quite a unique international financial integration experience. The EU10 and the EU candidates, on average, were by the late 1990s importing capital on a larger scale (Figure 2, second and third chart) compared to the varying reliance on external finance in the case of the EU neighborhood (Figure 2, fourth chart). Yet, the process does appear to have reached its limit in many countries during 2007-08. Indeed, it is then that investment appears to have adopted a 5