Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Economic Prospects for CESEE Region and Key Challenges

Peter HavlikThe Vienna Institute for International Economic Studies (wiiw)

20 Years of Economic Reform in CESEEPaneuropean University Bratislava, 8th February 2013

Ó wiiw

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Euro area in recession (2012-2013) with shallow recovery (2014-2015) ahead

CESEE: after a weak recovery 2010-2011 growth has slowed down anew in 2012

Recession in some NMS and most of SEE

‘Fringes’ (RU, UA, KZ) more resilient than the core (NMS, SEE), at least so far

External environment and impacts on CESEE

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World market commodity prices (affect ‘fringes’)

EU in turmoil (affect mostly ‘core’)

Austerity economics prevails nearly everywhere

Weaker growth expected also in the medium-term

A new growth model ?

From export-led to domestic demand driven growth ?

External environment and impacts on CESEE

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2009 2010 2011 2012 2013 2014 2015

Household final consumption + 5 10 14 11 14 16 16

- 11 6 2 5 2 0 0

Government final consumption + 10 8 9 9 12 13 15

- 6 8 7 7 4 3 1

Gross fixed capital formation + 1 6 11 9 14 16 16

- 15 10 5 7 2 0 0

Trade balance + 16 9 8 11 9 6 6

- 0 7 8 5 7 10 10

Evolution of GDP growth drivers, 2009 - 2015 no. of countries with positive/negative contributions to GDP growth

Note: A figure in a + row indicates the number of countries that had a positive contribution. A figure in a - row indicates the number of countries that had a negative or stagnant contribution.

Source: wiiw estimates incorporating national and Eurostat statistics.

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Growth can rely less on the contribution of the external sector

Thus, greater dependence on domestic demand needed

But:- Consumption and investment demand characterized by

difficult financing conditions and deleveraging processes- Fiscal policy in most countries excessively restrictive

Therefore: dampened recovery processes will extend well over 2013 and afterwards

Slower growth expected also in the medium-run

Serious implications for labour markets, in parts of the region even dramatically high unemployment is here to stay

Prospects 2013 - 2015

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North-South divide(s) in Europe deepens: country groups in CESEE (CE-3, Baltics perform better than HU, Sl, HR; rest of SEE and GIPS)

Most important differences across countries:- Debt build-up prior to the crisis (mainly of the private sector)- Longer-term weaknesses of the export sector; exchange rate regime- Different responses in terms of economic policy (in particular fiscal

policy; wage policy etc.)

Expected impact of the economic policy reformulation of the eurozone; different impacts on EU-, Euro-zone, non-members)

Next EU budget likely curtailed, yet Vienna Initiative 2.0 may partly help as EBRD, EIB, The World Bank will provide additional funding (EUR 30 bn)

Prospects 2013 - 2015 (cont’d)

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EU muddling through (baseline scenario)

2012-2013 rather disappointing in terms of growth

the next forced rebalancing not yet over- threat #1: recession in euro area deepens in 2013 while

austerity continues (multipliers discussion)- threat #2: EU (eurozone) implodes, recession returns

opportunity: austerity relaxed/suspended

EU policy orientation overhauled, closer integration

Medium-term threats and opportunities

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Source: wiiw (February 2013), European Commission (Autumn Report, November 2012) for EA.

GDP growth rates 2012 and forecasts for 2013 - 2015

LV KZ RU LT EE SK PL AL BG RO UA EA MK BA ME CZ HU HR RS SI-2

-1

0

1

2

3

4

5

6

7

2012 2013 2014 2015