The fallout from the turbulence in EM financial markets has split Emerging Europe into two groups. One group contains Turkey, Russia and Hungary, whose currencies have been among the hardest hit in the emerging world. This reflects deteriorating external positions (Turkey and Russia) and excessively loose monetary policy (Turkey and Hungary). The other group contains Poland and the Czech Republic whose external vulnerabilities are smaller and, as a result, their currencies have been relatively unscathed. In the meantime, while the market rout has been stoked by deteriorating growth prospects in the emerging world, the recent improvement in the economic data from Central Europe serves as a reminder that there are still some countries where the outlook is brightening.
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