Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Impacts of the global crisis and future growth challenges

Strategie Evropa 2020 jako reakce na krizi: cesty k posílení

ekonomického rustu a konkurenceschopnosti

Peter Havlik

The Vienna Institute for International Economic Studies (wiiw)

September 2010

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Growth model, global crisis and the Strategy Europe 2020

Key points:

Growth model: liberalization and integration

Global crisis: transmitted via the growth model

Strategy Europe 2020: a revival of Lisbon ?

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Key features of the (old) growth model:

significant internal and external liberalization (trade flows, capital transactions, financial market integration)

targeted at integration with the EU area

benefits: capital inflows (FDI), trade integration, ‘technology’ transfer; institutional convergence

the model worked - ‘convergence process’ – but structural (and sometimes unsustainable) imbalances emerged

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Trade balance of goods and services, in % of GDP

-24-18-12

-606

-24-18-12

-606

-24-18-12

-606

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

NMS-5 (CZ)

Baltics

SEE

NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001).Source: wiiw Annual Database incorporating national statistics, Eurostat.Source: wiiw Annual Database incorporating national statistics, Eurostat.

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Income catching-up: per capita GDP at PPPProjection assuming a 50% growth differential with respect to EU-27 after 2013 (compared to

the average growth differential in the period 2000-2008)

EU-27 average = 100

0

10

20

30

40

50

60

70

80

90

100

1995 2000 2005 2008 2009 2010 2015 2020

BG CZ HU PL RO SK

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Three transmission channels of the crisis:

I. Collapse of demand for imports from the region

- => collapse of exports

- => collapse of industrial production

- => collapse of oil and metals prices (RU, UA, KZ)

II. More difficult credit financing for households, companies and government after September 2008 (Lehman Brothers exit)

III. Hardly any counter-cyclical economic policy measures of the state (except Russia, Kazakhstan and Poland)

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5060708090

100110120130140150160170

Ja

n-0

4

Ma

y-0

4

Se

p-0

4

Ja

n-0

5

Ma

y-0

5

Se

p-0

5

Ja

n-0

6

Ma

y-0

6

Se

p-0

6

Ja

n-0

7

Ma

y-0

7

Se

p-0

7

Ja

n-0

8

Ma

y-0

8

Se

p-0

8

Ja

n-0

9

Ma

y-0

9

Se

p-0

9

Ja

n-1

0

Ma

y-1

0

CZ HU SK

Collapse of exports after Sept. 2008

in EUR, January 2007 = 100

Quelle: wiiw-Monatsdatenbank.

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Source: wiiw Database based on Eurostat.

0

20

40

60

80

100

120

140

-15 -12 -9 -6 -3 0 3 6 9

BG

HU DE

GR

IE

PT

EU-27

FR

ES

UK

DKSE

NLAT

IT

SK

CZ

LV SIRO

EE

Unsustainable High public debt

High fiscal deficit Maastricht compliant

Budget deficit and public debt, 2008

in % of GDP (Maastricht criteria)NMS OMS EU-27

Fiscal deficit (< 3%)

Pu

blic

deb

t (<

60%

)

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Unsustainable High public debt

High fiscal deficit Maastricht compliant

NMS OMS EU-27

Fiscal deficit (< 3%)

Pu

blic

deb

t (<

60%

)

Source: European Commission forecast.

0

20

40

60

80

100

120

140

-15 -12 -9 -6 -3 0 3 6 9

PL

DE

PT FR

ES

SE

DK

AT NL

UK IE

IT

SI SK LT

RO

EE

BG

HU

LV CZ

EU-27

GR

Budget deficit and public debt, 2010

in % of GDP (Maastricht criteria)

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Strategy Europe 2020

Raising the employment rate of the population aged 20-64 from

the current 69% to 75%

Raising the investment in R&D to 3% of the EU's GDP

Meeting the EU's '20/20/20' objectives on greenhouse gas

emission reduction and renewable energies

Reducing the share of early school leavers from the current 15%

to under 10% and making sure that at least 40% of youngsters

have a degree or diploma

Reducing the number of Europeans living below the poverty line

by 25%, lifting 20 million out of poverty from the current 80

million.

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Employment by skill groups

average changes 2000-2007, 2008 and 2009, in %

-15

-10

-5

0

5

10

00

-07

08

09

00

-07

08

09

00

-07

08

09

00

-07

08

09

00

-07

08

09

00

-07

08

09

Total High-skill Medium-skill Low-skill

Source: Eurostat, wiiw calculations.

EU-27 CZ HU PL SK RO

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ULC growth and contributions of main components,

average annual changes in %, 2005-2010

‘Fixers’

12.8

-8.1

-15.3

10.9

4.5

-9.9

9.8

-3.6

1.8

10.5

0.22.5

5.6

-0.2

16.2

15.011.9

2.2

0.0-5.0

9.0

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

av.05-08

20092010 av.05-08

2009 2010 av.05-08

20092010 av.05-08

20092010 av.05-08

2009 2010 av.05-08

20092010 av.05-08

2009 2010-20

-15

-10

-5

0

5

10

15

20

Average gross wages GDP Employed persons Exchange rate ULC (rhs)

BG EE LV LT SK SI AT

Source: wiiw Annual database incorporating national statistics and Eurostat.

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ULC growth and contributions of main components

average annual changes in %, 2005-2010

‘Floaters’

9.5

4.26.6

17.2

-1.1

4.0

19.3 20.622.2

-15.1

18.611.5

-3.0

5.6

-15.5-6.3

0.5

-4.6

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

av.05-08

2009 2010 av.05-08

2009 2010 av.05-08

2009 2010 av.05-08

2009 2010 av.05-08

2009 2010 av.05-08

2009 2010-25

-20

-15

-10

-5

0

5

10

15

20

25

Average gross wages GDP Employed persons Exchange rate ULC (rhs)

CZ HU PL RO RU UA

Source: wiiw Annual database incorporating national statistics and Eurostat.

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Exchange rates Flexible exchange rates have supported sustainable current

account deficits

‘Floater’ countries had a less costly adjustment to the crisis (lower

employment losses)

Nominal depreciations improve competitiveness and support growth

once external demand recovers

Fixed exchange rates tend to mandate procyclical fiscal policies

during the crisis and in the medium run

EMU membership may not protect against real exchange rate

misalignments

Flexibility helps – especially in times of crisis

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Constraints following the crisis:

External factors:

higher risk assessment of the region;

more difficult external (and internal) financing;

reduced growth expectations in the most important export markets;

tougher to join the eurozone (new OCA debate)

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Constraints following the crisis:

Internal factors:

‘Deleveraging’ of private sector, increased propensity to save;

more limited room to manoeuvre for fiscal policy;

weaker and more cautious banking sector;

very differentiated processes of real exchange rate adjustments

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Some tentative conclusions

EU and national policies should be reformed in order to improve

“economic governance”

in order to benefit from trade and financial integration regulation is

needed

to deal with external and domestic imbalances measures to improve

competitiveness needed (Strategy Europe 2020)

depending on the types and severity of imbalances, the speed to full

integration should be calibrated (“flexibility” helps)

depending upon country-specific circumstances, the ‘integration

model of growth’ must be adjusted but not abandoned

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Selected references: ‘Will Exports Prevail over Austerity?’ wiiw Current Analysis and

Forecasts, No. 6, July 2010, Vienna

‘Whither Growth in Central and Eastern Europe? Policy lessons for an integrated Europe’ Policy Report written by the Bruegel-wiiw Expert Group, Vienna and Brussels, June 2010

Atoyan, R., (2010), ‘Beyond the Crisis: Revisiting Emerging Europe’s Growth Model’, IMF Working Paper 10/92

Havlik, P., (2010), ‘Unit Labour Costs, Exchange Rates and Responses to the Crisis’, wiiw Monthly Report No. 7/10, July

Haddad, M., Harrison, A., Hausman, C., (2010), ‘Decomposing the Great Trade Collapse: Products, Prices, and Quantities in the 2008-2009 Crisis’. NBER Working Paper No. 16253, August

IMF-ILO, (2010), ‘The Challenges of Growth, Employment and Social Cohesion’. Discussion document prepared for joint IMF-ILO conference, September