Ten Years of Membership and Crisis
Management in the Central and
Eastern European Member States
of the EU
András Vértes
Chairman
GKI Economic Research
22 May 2014, Brussels
GKI Zrt., www.gki.hu
Crisis Hit
Financial and economic crisis hit the region mostly by:
• freezing of the international capital flows,
• the drop of import needs of the W-E countries
Result: stability failure, but mostly current account
balance and foreign debt financing problems, rather
than general government debt crisis (as in EAP6).
„Openness” transformed to „exposure”.
These needed fast and radical external equilibrium
improvement.
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Capital plus current account
(in per cent of GDP)
Source: Eurostat, EU 2014 Spring Forecast
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Net international investment position
(in per cent of GDP)
Source: Eurostat, EU 2014 Spring Forecast
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Broken Convergence?
Before the crisis general catching up:
„economic miracle” (except HU)
Further sizable catching up after 2007 in
Poland, Lithuania, Latvia, Bulgaria, Romania, Slovakia
Stagnation or decline in
Estonia, Hungary, Croatia, Czech Republic, Slovenia
Last decade = lost decade for CZ, HU, SI (2004: three best)
But general line up to EU average continued
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GDP (PPS) per capita
(as per cent of EU average)
Source: Eurostat
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Fiscal adjustment
• Successful internal devaluation (on an extremely flexible
labour market) in Baltic States, but unrepeatable elsewhere!
• New, more or less sustainable path, excluding Slovenia
and Croatia. Potential risk in Hungary and Slovakia.
• Fiscal adjustment has the most favourable effects if
− well planned in timing (neither too fast, nor too slow),
− concerned with the stake-holders,
− the banking system is solid with good lending capacity,
− social welfare services are strong.
• Share of external financing increasing
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General government gross debt
(ESA, as percentage of GDP)
Source: Eurostat, EU 2014 Spring Forecast
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Foreign financed general government
gross debt to GDP (2008, 2012 in per cent)
60
2008
2012
50
40
30
20
10
0
CZ
Source: Eurostat, GKI calculations
HU
SI
PL
BG
RO
EE
LV
LT
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Social tensions
• Sharp worsening in:
 unemployment rate
 income inequality, risk of poverty
government spending on social welfare
• Turnaround towards grey and black economy (mostly sme-s)
• Young generation has little chance to get the right job on the
labour market – migration to W-E
• Free movement on the European labour market – debated
question!?
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Unemployment rate
(in per cent)
Source: Eurostat , EU 2014 Spring Forecast
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Financial sector
• Guilty and victim at the same time
political push and overtaxation
• High share of foreign ownership
 stagnation of funding (Vienna Initiative)
 new tendency: withdrawal behind the national border
• Deleveraging and NPL: access to finance
• Too low inflation
• Instable money markets, yields and exchange rates
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Percentage of the banking system that
is foreign owned, CEE10 and EAP6
100
90
2008
80
2012
70
60
50
40
30
20
10
0
SI HU LV PL BG LT RO CZ SK EE
ES IT PT EL CY IE
Note: This percentage is calculated as the total assets of foreign owned subsidiaries/branches as % of total banking system assets
Source: André Sapir, Guntram B. Wolff (Bruegel) 2013.
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Banks foreign funding exposure
(in per cent of GDP, 2008-2012)
120
110
100
90
80
70
60
50
40
2008/03/
2009/03/
CZ
Source: Mihály Kovács, ECFIN Country Focus , July 2013
2010/03/
HU
PL
2011/03/
RO
2012/03/
SK
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Corporate sector debt in the CEE10 and EAP6
(in per cent of GDP)
220
2008
200
2012
180
160
140
120
100
80
60
40
20
0
LT
HU
LV
RO
EE
BG
PL
CZ
Source: Private sector deleveraging in Hungary: economic costs amplified by government policies in the banking sector,
Mihály Kovács, ECFIN Country Focus, July 2013
SK
SI
EL
ES
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Household sector debt in the CEE10 and EAP6
(in per cent of GDP)
120
2008
2012
100
80
60
40
20
0
RO
BG
Source: Mihály Kovács (2013)
LT
HU
LV
EE
SK
SI
CZ
PL
ES
PT
IE
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Interest rate spreads over 10ys euro yield
(basis point)
Source: Eurostat
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CE currencies exchange rate to the euro
(31 December 2009 = 100)
Source: ECB
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Crisis Management in CEE
Market assessment: the best three Poland, Estonia and
Slovakia, none of them was among top three (SI, CZ, HU) at
the time of accession
Neither size, nor geography, nor EMU membership, nor
development level mattered!
Crucial: performance of the national governance
• understanding world changes and deepness of the crisis,
• prepared for unexpected, collect and mobilise reserves,
• look for international support,
• improve ability to adapt (education, LLL, retraining).
Future risk: low growth with high debt!
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Recommendations 1.
Sound budgetary policies, smart budget reforms
• MFF should support public services reforms
(aiming long term savings and improved quality)
• Positive incentives to budget consolidation
– common pool for the financing of the state debt in EA
– establishment of a EU level Treasury (eurobonds),
– yearly maximum 3% of GDP fresh debt financing for a
country who meet the new EDP criteria,
– the yield could be lower than actual market rate,
– the same might apply to non-euroarea country if it
meets the criteria.
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Recommendations 2.
Sound budgetary policies, smart budget reforms
• Coordinated measures at the level of EU against tax evasion
and fraud
• Promoting joint management of government functions of
member states (foreign representation, R&D&I, higher
education, special hospital treatments, etc.)
• As under well designed circumstances a modest (2-3%)
inflation might help to improve the budget equilibrium and
debt rate, rethinking of the regulation is suggested
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Recommendations 3.
Supporting the decrease of government debt
• Give incentives to privatisation if it reducing debt and
improving competition (together with smart regulation and
consumer protection)
• Establishing an independent EU think tank dealing with
budgetary reforms, best practices and lessons from mistakes,
and country recommendations
• The macro assumptions should be discussed with EU-wide
think tanks
• Fine tuning of new EDP rules
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Recommendations 4.
Supporting growth
• New tools of the economic governance (banking union, MIP)
should aim to improve growth potential of the EU
• Non-bank financing channels should be strengthened
accessible for SME sector (cheap refinancing, venture capital,
EIB, direct EU budget financing)
• EU-level effective deregulation programs
• Establishing a fund in EU budget for 200 best universities
to attract the best experts of the world (with quotas for
students coming from less developed member states)
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Recommendations 5.
Eurozone entry
• As euro-zone stabilises it offers stability advantages to CEE
member states
• Joining to the EMU will have a positive effect on growth and
competitiveness of non euro-zone CEE countries and on
euroarea as well
• Entry criteria can be simplified concentrating on medium term
sustainability
• It needs the revitalisation of a sizeable catching-up process
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Recommendations 6.
Towards social union
• Correction of the macro surveillance with strengthened
analyses of employment and social policies, introduction of new
EU standards
• Principles of pension system and unemployment benefit should
be unified and lift to EU level to shape the business cycle
• Complementing the social security with a mandatory funded
state pension sub-system which should be treated as a part of
General Government from the EDP point of view
• Increase social solidarity funds in the EU budget (child poverty,
homelessness, roma inclusion)
• Ensure transferability of social rights and services
• Improve mobility of workers by removing regulation barriers
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Thank you for your attention!
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