the performance of a few sectors, which makes the economy more vulnerable in the case of asymmetric shocks. last, but not least, i also want to point out the social dimension of growth – every group in society should benefit from the growth process such that the build - up of social inequalities and the resulting pressure on political economic institutions can be contained. with these considerations of balanced growth in mind, let us briefly look back on the precrisis economic developments in cesee in order to have a reference for the intensity of the recession in 2009 and the related adjustment process since then. bis central bankers ’ speeches chart 1 high growth correlated with the build - up of severe vulnerabilities and imbalances h igh growth correlated with the build - up of severe vulnerabilities and imbalances average annual gdp per capita growth ( 2000 - 07 ) current account deficit % % of gdp estonia romania lithuania latvia bulgaria slovakia croatia czech r. hungary poland slovenia bulgaria latvia estonia lithuania romania hungary croatia poland slovakia slovenia czech r. share of foreign currency loans average annual growth in h ouse prices ( 2004 - 07 ) % of total loans % latvia estonia croatia hungary lithuania romania bulgaria poland slovakia czech r. slovenia latvia lithuania bulgaria estonia poland slovenia slovakia czech r. hungary croatia romania source : wiiw, eurostat, ncbs, ameco, imf, bis, ecb, national statistical offices, reas. between 2000 and 2007, the cesee countries were – besides china and india – one of the fastest growing regions in the world ( average real gdp per capita growth : 8. 2 % ). this outstanding growth performance was mainly driven by large foreign capital inflows, which fuelled domestic credit growth, led to a surge in asset prices ( in particular house prices ) and considerably boosted domestic demand. however, as you can see in chart 1, the sizable gdp growth was generated on the back of rising vulnerabilities. soaring prices and wages were one of the consequences of sharply rising domestic demand. as a matter of fact, double - digit inflation rates were not unusual during the boom years. on top of very strong lending growth in the years preceding the crisis, a large part of domestic loans to households and companies was – and in some countries still is – denominated in foreign currency. growing internal imbalances were also reflected by the development of the external sector. increasing internal demand led to an appreciation of the exchange rates in countries with floating

and achievements. focus on european economic integration – special issue 2009. oenb. 56 – 65. bis central bankers ’ speeches less smooth due to large swings in cesee cycles, particularly for small countries, as will be discussed tomorrow in a presentation of the oenb4. a delayed catching - up process poses serious challenges to further economic and institutional reforms in cesee and might affect the people ’ s support for european integration. a continuous reduction of regional inequalities in europe is also in the interest of western europe, given that – according to recent studies – a reduction of income inequality has beneficial effects on the long - run growth potential of an economy. conclusion let me conclude : pronounced boom - bust cycles not only lead to high output volatility but also hurt the longterm growth prospects of an economy. this is especially valid for the cesee economies that experienced a sharp output decline in 2009 and – according to our latest oenb - bofit projections – there might even be a second recession phase in the wings in several countries of the region. the main lesson from the 2008 – 09 crisis is that the foreign capital inflow - based growth model is not sustainable in the long run and cross - country contagion via trade and financial channels from western to eastern europe can be quick and substantial. many countries undertook severe restructuring programs during the last years which aimed at reducing their public and private sector indebtedness and increasing their external competitiveness. however, we will have to watch the success of these programs very closely in the upcoming years. we also saw that the economic adjustment costs caused by high output volatility are substantial, as they have a direct impact on the speed of the catching - up of eastern european income levels to those in western europe. a substantial delay in the convergence process cannot be in our interest. therefore, ladies and gentlemen, we have to find new growth models that prove to be sustainable and crisis - resilient and continue to promote the convergence process – and this is one of the goals of this year ’ s ceei. ladies and gentlemen, i once again welcome you to this year ’ s ceei, i wish you a stimulating and productive conference and thank you for your attention. gachter, m., a. riedl and d. ritzberger - grunwald ( 2012 ). business cycle convergence or decoupling? economic adjustment within the european union. oenb. mimeo. bis central