the eu-ms' economies of central and east europe
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XXIV Seminario sobre Europa central (San Sebastian, 11/7/2012)TRANSCRIPT
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
CEE Economies, State of Play
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
TREACHEROUS TIMES IN THE GLOBAL
ECONOMY
• Increased market jitters,
• reduced capital inflows, and
• high-income fiscal and financial-sectorconsolidation
=> have and are expected to keep growth weak
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
CEE Recent Developments
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
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 prices
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
ECONOMIC SLOWDOWN THROUGHOUT EUROPE,YET STRONG GROWTH IN CEE
• CEE grew by 3.1% in 2011, resuming the convergenceprocess with EU15• Sufficient to recover CEE output losses from the globalfinancial crisis (but not for each country)
GDP Growth in EU10 and EU15, percent4
3
23.1
1 2.11.4
2.0
0 2009-1 2010
-2 -4.4-3.7 2011
-3
-4
-5
EU15 EU10
Source: Eurostat, WB, Commission
Services
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
BALANCED ECONOMIC GROWTH IN CEE• Relatively broad-based
• Driven by manufacturing and construction
Contributors to GDP Growth in EU10
Final cons. GFCF Changes inv. Net exports Other GDP
Contributions to Value-Added Growth in EU10
Agriculture Manufact. Constr. Services Non-market services4
4
3 3
2 2
11
0
0
-1
-1
2010 2011 1Q 11 2Q 11 3Q 11 4Q 11
Source: Eurostat, World Bank, EC
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
ECONOMIC PERFORMANCE
ON A WEAKENING PATH• With the mild recession in the euro area, growth in CEEdecelerated in each quarter of 2011 and first quarter of 2012
GDP Growth in CEE and EU15, percent, q-o-q sa 1Q 11-1Q 121.2
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 VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
NET EXPORTS CONTINUED CONTRIBUTING TO
GROWTH IN 2011Growth in Exports and Imports• External economic
activity abated in keytrading partners (EU15)
• EU10 exports and importsweakened, but their
growth rates remainedpositive
• Consequently, EU10current account balancesimproved
Exports Imports
16
14
12
10
8
6
4
2
0
EU15 EU10 EU15 EU10 EU15 EU10
2010 2011 2012 f
Source: Eurostat, EC, World Bank
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
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 notablyGrowth in Exports by Trade Partner and Goods Category, EUR (%,)
EU15 EU1040
35
30
25
20
15
10
5
0Mar-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 Consumptiongoods goods
Source: Eurostat, EC, World Bank.
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
EXTERNAL DEBT LEVELS STABILIZED
• Overall, EU10 external debt to GDP remained almost unchanged
• But large current account adjustments in some countriesbrought debt levels down
External Debt to GDP in EU10
180
160
140
120
10080604020
0
EU11 BG CZ EE LV LT HU PL RO SI SK HR
Source: Central banks, EC, World Bank staff calculations
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
70
MONETARY POLICY STAYED ACCOMMODATIVE• Monetary policy instruments used against external shocks
• Flexible exchange rates in some EU10 countries helped boostcompetitiveness
• Interest rates stayed lowReal Effective Exchange Rates, CPI Deflated
(Index: Aug 2008=100)
CZ HU PL
RO HR
110 105
100
95
90
85
80
75
Policy Interest Rates , %
CZ HU PL RO EURO
zone US
1412
10
8
6
4
2
0
Source: Central banks, EC, World Bank
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
ORDERLY DELEVERAGINGCumulative Gross Capital Inflows, EU10 (€ billions) Foreign Bank Claims in EU10
80
70
60
50
40
30
20
10
0
-10
FDI Portfolio Other 120110
100
90
80
70
60
50
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 EU10countries in second half of 2011
• Funding pressures on EU10 banks intensified
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
FINANCIAL SECTOR REMAINED RESILIENT
• Credit remained constrained by both demand and supply factors• Local private sector deposits became the dominant source of
EU10 fundingReal Credit Growth in EU10 and EU15
24EU15 EU10105 20
16
100 12
8
95 %4
0
90 -4
-8
85 -12-16
-2080
Private Sector Deposits Growth and Contributions Households Corporate
Other private Private sector
EU11 BG CZ* EE HR* LV LT HU* PL* RO* SK SI
Source: ECB, EU11 Central Banks, World Bank, EC
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
EU10 FEU10 FISCALISCAL C CONSOLIDATIONONSOLIDATION C CONTINUEDONTINUED
• Fiscal consolidationmeasures improved EU10
public finance position
• Consolidation was largelyexpenditure-based, but
spared public investment
• Public debt-to-GDPincreases continued, but
less in EU10 (48.2 in 2011 from
46.4 in 2010 ) than EU15 (86.3in 2011 from 82.8 in 2010)
General Government Fiscal Deficits 2010 2011 Projected Oct 2011
2011 Actual
0-1
-2 -4.5 -4.7 -4.0 -3.7-3 -6.6 -6.4
-5
-6
-7
-8
-9
-10EU15 EU10
Source: Eurostat, April 2012 EDP notifications, EC, World Bank staff
Wages and salaries Social benefits Other currentCapital spending Total
expenditure6
5
4
3
2
1
0
-1
-2
EU11 LV LT SK RO EE BG PL HU CZ HR SI
Source: Eurostat, EC (Ameco), World Bank staff calculations
-4
Expenditure Reductions, 2010 to 2011, % GDP
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
MARKETS RESPOND TO FISCAL EFFORTS
• Currently, sovereign CDS spreads are much higher forcountries 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 calculationsNote: The size of the bubbles represents 5Y CDS spreads.
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
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 crisisGDP and Employment Growth Unemployment Rates
GDP growth Employment growth Pre-crisis Crisis peak Current4 253
2 2010 15
-1-2 10
-3
-4 5
-52009 2010 2011 2009 2010 2011 0
EU15 EU10 EU15 EU10HR SK BG LT LV HU EE PL SI RO
Source: EC, Eurostat, World Bank staff calculations.
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
UNEMPLOYMENT AFFECTED THE MOST VULNERABLE
• High jobless rate among the youth and the unskilled
Unemployment Rates:Low-skilled vs. Total
50
40
30
20LV LT
Unemployment Rates:Youth vs. Total
40
30
20
LV LT
SK EE HR
10
RO SI00 10
HR HUBG
PL EE
CZ
20 30 40 50
10 HU BGSI PL
CZ RO
0
0 10 20 30 40
Low-skilled unemployment rate in 2011 Youth unemployment rate in 2011
Source: EC, Eurostat, World Bank staff calculations.
• Long-term unemployed in total unemployed rose from 44% percent before the crisis to almost 50% in 2011
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
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(Percent)
EU15 EU102.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Growth in Real Labor Productivity and RealUnit Labor Cost, 2011 (Percent)
RLPP
RULC8
6
4
2
0
-2
-4
-6
EU15 EU11 BG LT PL HR LV RO SI SK CZ HU EE
Source: EC, Eurostat, World Bank.
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
INFLATION STAYED ELEVATED
• Headline inflation in the EU10 was high in 2011 due toincreases 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 energyEU15 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 VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
EU10 Short-Term Outlook
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
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)
23
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
GROWTH IN EU10 COUNTRIES TO SLOW DOWN IN 2012
Even this projectedmodest growth assumesthat appropriate policies
will be adopted in theEuro area to successfully
avoid a seriousdeterioration ininternational financial
market conditions
EU10Bulgaria
Czech RepublicEstonia
LatviaLithuaniaHungaryPoland
RomaniaSlovenia
Slovak Republic
Memo:
EU15
2011 2012 2013
3.1 1.5 2.51.7 0.6 2.51.7 0.0 1.07.6 1.7 3.05.5 2.3 2.95.9 2.3 3.51.7 -0.4 1.54.3 2.9 3.22.5 1.2 2.8
-0.2 -1.2 0.63.3 2.1 3.1
1.5 -0.1 1.2
Source: Commission Services, WB.
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
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 baseline
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
EU10 Policies for Growth
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
A THREE-PRONGED POLICY TO BOOST GROWTH
1) Central banks and financial supervisoryauthorities across the EU have to shore upconfidence of financial markets:
- Monetary policy should continue to be
accommodative to buffer EU10 against externalshocks and help defend against euro area volatility.
- Financial sector polices should be in place to ensure access to credit for viable borrowers despite banks' balance sheet pressures and ongoing deleveraging.
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
A THREE-PRONGED POLICY TO BOOST GROWTH
2) Calibrate fiscal consolidation to support growth:- With heightened uncertainty and market pressures
and decelerating economic growth, EU10governments must decide how much, how fast, andin what ways to consolidate public finances, so thatfiscal positions do not become a source for financialmarket volatility.
- In designing the composition of fiscal consolidation,governments should take into account the fragility ofthe economic outlook and try to limit the negativeimpact of fiscal consolidation on growth.
Dirk VerbekenDirk VerbekenDG Economic and Financial AffairsDG Economic and Financial Affairs
San Sebastian, July 2012San Sebastian, July 2012
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 labourmarkets, the EU10 countries can increase theirpotential economic gains in the medium term.
- Closing the existing institutional and structural gapswith the rest of the EU will soften the constraintsimposed by demographic trends and facilitateincome convergence with EU15.