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The EU-MS' Economies of central and east Europe

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XXIV Seminario sobre Europa central …

XXIV Seminario sobre Europa central
(San Sebastian, 11/7/2012)


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  • 1. CEE Economies, State of PlayDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 2. TREACHEROUS TIMES IN THE GLOBAL ECONOMY • Increased market jitters, • reduced capital inflows, and • high-income fiscal and financial-sector consolidation => have and are expected to keep growth weakDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 3. CEE Recent DevelopmentsDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 4. DESPITE CHALLENGING EXTERNAL ENVIRONMENT, CEE WEATHERED THE STORM IN 2011 • Relatively strong economic growth, but large differences across countries • Bold fiscal consolidation measures, but further strengthening of public finances remains a top priority • Orderly deleveraging in the EU10 financial sector thus far, but funding pressures • Employment growth, but unemployment affecting the most vulnerable • Elevated inflation due to increases in indirect taxes and commodity pricesDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 5. ECONOMIC SLOWDOWN THROUGHOUT EUROPE, YET STRONG GROWTH IN CEE • CEE grew by 3.1% in 2011, resuming the convergence process with EU15 • Sufficient to recover CEE output losses from the global financial crisis (but not for each country) GDP Growth in EU10 and EU15, percent 4 3 2 3.1 1 2.1 2.0 1.4 0 2009 -1 2010 -2 -3.7 2011 -4.4 -3 -4 -5 EU15 EU10 Source: Eurostat, WB, Commission ServicesDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 6. B ALANCED E CONOMIC G ROWTH IN CEE • Relatively broad-based • Driven by manufacturing and construction Contributors to GDP Growth in EU10 Contributions to Value-Added Growth in EU10 Final cons. GFCF Changes inv. Net exports Other GDP Agriculture Manufact. Constr. Services Non-market services 4 4 3 3 2 2 1 1 0 0 -1 -1 2010 2011 1Q 11 2Q 11 3Q 11 4Q 11 Source: Eurostat, World Bank, ECDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 7. E CONOMIC P ERFORMANCE ON A W EAKENING P ATH • With the mild recession in the euro area, growth in CEE decelerated in each quarter of 2011 and first quarter of 2012 GDP Growth in CEE and EU15, percent, q-o-q sa 1Q 11-1Q 12 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 EU15 EU10 Source: Eurostat, EC, World Bank;Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 8. N ET E XPORTS C ONTINUED C ONTRIBUTING TO G ROWTH IN 2011 in Exports and Imports Growth • External economic Exports Imports activity abated in key 16 trading partners (EU15) 14 12 • EU10 exports and imports 10 weakened, but their 8 growth rates remained 6 positive 4 • Consequently, EU10 2 current account balances 0 EU15 EU10 EU15 EU10 EU15 EU10 improved 2010 2011 2012 f Source: Eurostat, EC, World BankDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 9. CHANGING TRADE PATTERNS IN EU10 • Notable export deceleration over the past year, especially in intermediate goods and in intra-EU trade • In contrast, trade outside the EU grew notably Growth in Exports by Trade Partner and Goods Category, EUR (%,) EU15 EU10 40 35 30 25 20 15 10 5 0 Mar-11 Mar-12 Mar-11 Mar-12 Mar-11 Mar-12 Mar-11 Mar-12 Mar-11 Mar-12 Mar-11 Mar-12 Total exports Intra EU Extra EU Interme diate Capital goods Consumption goods goods Source: Eurostat, EC, World Bank.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 10. EXTERNAL DEBT LEVELS STABILIZED • Overall, EU10 external debt to GDP remained almost unchanged • But large current account adjustments in some countries brought debt levels down External Debt to GDP in EU10 180 160 140 120 100 80 60 40 20 0 EU11 BG CZ EE LV LT HU PL RO SI SK HR Source: Central banks, EC, World Bank staff calculationsDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 11. MONETARY POLICY STAYED ACCOMMODATIVE • Monetary policy instruments used against external shocks • Flexible exchange rates in some EU10 countries helped boost competitiveness • Interest rates stayed low Real Effective Exchange Rates, CPI Deflated Policy Interest Rates , % (Index: Aug 2008=100) CZ HU PL RO EURO CZ HU PL zone US RO HR 14 110 12 105 100 10 95 8 90 6 85 4 80 2 75 0 70 Source: Central banks, EC, World BankDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 12. ORDERLY DELEVERAGING Cumulative Gross Capital Inflows, EU10 (€ billions) Foreign Bank Claims in EU10 80 FDI Portfolio Other 120 110 70 60 100 50 90 40 80 30 70 20 60 10 50 0 -10 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 Source: Eurostat, BIS, EC, World Bank. • Capital flows to EU10 contracted by almost 25% since 2010 • Cross-border claims by foreign banks dropped in all EU10 countries in second half of 2011 • Funding pressures on EU10 banks intensifiedDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 13. FINANCIAL SECTOR REMAINED RESILIENT • Credit remained constrained by both demand and supply factors • Local private sector deposits became the dominant source of EU10 funding Real Credit Growth in EU10 and EU15 Private Sector Deposits Growth and Contributions Households Corporate EU15 EU10 24 105 20 Other private Private sector 16 100 12 8 95 %4 0 90 -4 -8 85 -12 -16 -20 80 EU11 BG CZ* EE HR* LV LT HU* PL* RO* SK SIDirk Verbeken ECB, EU11 Central Banks, World Bank, EC Source: San Sebastian, July 2012DG Economic and Financial Affairs
  • 14. EU10 FISCAL CONSOLIDATION CONTINUED General Government Fiscal Deficits • Fiscal consolidation 2010 2011 Projected Oct measures improved EU10 2011 2011 Actual -1 public finance position 0 -2 -4.5 -4.7 -4.0 -3.7 -3 -6.6 -6.4 -4 -5 -6 • Consolidation was largely -7 -8 -9 expenditure-based, but EU15 -10 EU10 spared public investment Source: Eurostat, April 2012 EDP notifications, EC, World Bank staff Expenditure Reductions, 2010 to 2011, % GDP Wages and salaries Social benefits Other current Capital spending Total • Public debt-to-GDP expenditure 6 5 increases continued, but 4 3 less in EU10 (48.2 in 2011 from 2 46.4 in 2010 ) than EU15 (86.3 1 0 in 2011 from 82.8 in 2010) -1 -2 EU11 LV LT SK RO EE BG PL HU CZ HR SIDirk Verbeken Source: Eurostat, EC (Ameco), World Bank staff calculations San Sebastian,San Sebastian, July 2012DG Economic and Financial Affairs
  • 15. MARKETS RESPOND TO FISCAL EFFORTS • Currently, sovereign CDS spreads are much higher for countries with high deficits and significant debt EU27 Public Debt, Deficits, and CDS Spreads, 20 15 10 5 0 -5 -10 0 50 100 150 200 Public debt as percent of GDP in 2011 Source: EC, Eurostat, Bloomberg, World Bank staff calculations Note: The size of the bubbles represents 5Y CDS spreads.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 16. GROWTH WAS LARGELY JOBLESS • Positive employment growth for the first time since 2008 • Modest employment creation mainly from part-time and temporary jobs • Employment gains lagged the recovery of output • Unemployment is as high as at the peak of the crisis GDP and Employment Growth Unemployment Rates GDP growth Employment growth Pre-crisis Crisis peak Current 4 25 3 2 20 1 0 15 -1 -2 10 -3 -4 5 -5 2009 2010 2011 2009 2010 2011 0 EU10 EU15 EU10 HR SK BG LT LV HU EE PL SI RO EU15Dirk Verbeken Source: EC, Eurostat, World Bank staff calculations. San Sebastian, July 2012DG Economic and Financial Affairs
  • 17. UNEMPLOYMENT AFFECTED THE MOST VULNERABLE Unemployment Rates: Unemployment Rates: Low-skilled vs. Total Youth vs. Total 50 40 40 30 30 20 20 LV LT LV LT SK EE HR HR HU 10 HU BG BG SI PL 10 CZ RO PL EE R O SI CZ 0 00 10 20 30 40 50 0 10 20 30 40 Low-skilled unemployment rate in 2011 Youth unemployment rate in 2011 Source: EC, Eurostat, World Bank staff calculations. • High jobless rate among the youth and the unskilled • Long-term unemployed in total unemployed rose from 44% percent before the crisis to almost 50% in 2011Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 18. REAL WAGES UNDER DOWNWARD PRESSURE • High unemployment rates and steadily declining vacancy rates in EU10 (lowest since 2008) put downward pressure on wages • Productivity outpaced real wages Vacancy Rate, EU10 and EU15 Growth in Real Labor Productivity and Real (Percent) Unit Labor Cost, 2011 (Percent) EU15 EU10 R 2.0 LPP 1.8 RULC 6 1.6 8 1.4 4 1.2 2 1.0 0.8 0 0.6 -2 0.4 0.2 -4 0.0 -6 EU15 EU11 BG LT PL HR LV RO SI SK CZ HU EE Source: EC, Eurostat, World Bank.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 19. INFLATION STAYED ELEVATED • Headline inflation in the EU10 was high in 2011 due to increases in indirect taxes and global commodity prices HICP, Overall and Core, EU15 and EU10 Energy and Food HICP, EU15 and EU10 EU10 overall EU10 core EU10 food EU10 energy EU15 overall EU15 core EU15 food EU15 energy 5 15 4 10 3 5 2 0 1 -5 0 -10 -1 -15 Source: EC, Eurostat, World Bank staff calculations.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 20. EU10 Short-Term OutlookDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 21. RENEWED FINANCIAL TURMOIL ADDS TO HEADWINDS AND CHALLENGES FACING EU10 • Economic activity strengthened through the first 4 ½ months of 2012 • Renewed financial turmoil in May added to pre- existing headwinds • In volatile environment, EU10 must keep focus on the medium-term • Risk of a crisis persists, with potentially serious consequences for high-income and developing countries (including EU10) 23Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 22. GROWTH IN EU10 COUNTRIES TO SLOW DOWN IN 2012 2011 2012 2013 Even this EU10 3.1 1.5 2.5 Bulgaria 1.7 0.6 2.5 projected Czech Republic 1.7 0.0 1.0 modest growth assumes Estonia 7.6 1.7 3.0 Latvia 5.5 2.3 2.9 that appropriate policies will be adopted in the Lithuania 5.9 2.3 3.5 Euro area to successfully Hungary 1.7 -0.4 1.5 Poland 4.3 2.9 3.2 avoid a Romania 2.5 1.2 2.8 serious Slovenia -0.2 -1.2 0.6 Slovak Republic 3.3 2.1 3.1 deterioration in international financial market conditions Memo: EU15 1.5 -0.1 1.2 Source: Commission Services, WB.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 23. SIGNIFICANT DOWNSIDE RISKS TO THE OUTLOOK • Further escalation of the euro area sovereign debt crisis would exert pressure on EU10 financial markets across asset classes • EU10 banking system is susceptible to deleveraging by euro area banks • Protracted recession in the euro area would spill over to EU10, especially for those with close trade links with troubled euro area countries • A major deterioration in conditions in the euro area could reduce GDP growth in EU10 by about 2 percent compared to the baselineDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 24. EU10 Policies for GrowthDirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 25. A THREE-PRONGED POLICY TO BOOST GROWTH 1) Central banks and financial supervisory authorities across the EU have to shore up confidence of financial markets: - Monetary policy should continue to be shocks and help defend against euro area volatility. accommodative to buffer EU10 against external - Financial sector polices should be in place to ensure access to credit for viable borrowers despite banks balance sheet pressures and ongoing deleveraging.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 26. A THREE-PRONGED POLICY TO BOOST GROWTH 2) Calibrate fiscal consolidation to support growth: - With heightened uncertainty and market pressures and decelerating economic growth, EU10 governments must decide how much, how fast, and in what ways to consolidate public finances, so that fiscal positions do not become a source for financial market volatility. - In designing the composition of fiscal consolidation, governments should take into account the fragility of the economic outlook and try to limit the negative impact of fiscal consolidation on growth.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs
  • 27. A THREE-PRONGED POLICY TO BOOST GROWTH 3) Structural policies can help overcome financial, labour and fiscal challenges and support growth - By removing barriers to growth in product and labour markets, the EU10 countries can increase their potential economic gains in the medium term. - Closing the existing institutional and structural gaps with the rest of the EU will soften the constraints imposed by demographic trends and facilitate income convergence with EU15.Dirk Verbeken San Sebastian, July 2012DG Economic and Financial Affairs