1. 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 Havlik The Vienna Institute for International Economic Studies (wiiw) 20 Years of Economic Reform in CESEE Paneuropean University Bratislava, 8 th February 2013

2.  wiiw 2  External environment remains rough  Imbalances at the outset of crisis  Current economic situation and key growth drivers  A new growth model ?  Medium-term prospects and challenges Main topics

3.  wiiw 3  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

4.  wiiw 4  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

5.  wiiw 5 Comparing emerging market economies (EMEs)  CE-5: Czech Republic, Hungary, Poland, Slovakia, Slovenia  B-3: Estonia, Latvia, Lithuania  SEE-2: Bulgaria, Romania  WB-6: Albania, Bosnia and Herzegovina, Croatia, Former Yugoslav Republic of Macedonia, Montenegro, Serbia  EU-COH: Greece, Portugal, Spain, Ireland  Turkey  Ukraine, Russia  ASIA-6: Indonesia, Korea, Malaysia, Philippines, Taiwan, Thailand  LATAM-8: Argentina, Brazil, Chile, Columbia, Ecuador, Mexico, Peru, Uruguay  MENA-6: Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia

6.  wiiw 6 Pre-crisis build-up of external imbalances: composition of the current account, 1995-2009, in % of GDP Note: ASIA-6 excl. Taiwan. Source: IMF International Financial Statistics and IMF WEO October 2010.

7.  wiiw 7 Pre-crisis build-up of external imbalances: net private financial flows in % of GDP, 1993-2009 Source: IMF Balance of Payments Statistics. ASIA-6 excl. Taiwan. LATAM-8 ASIA-6MENA-6 EU-COH CE-5 SEE-2 B-3 WB-6 TR

8.  wiiw 8 Exports by country groupings (EU-15, NMS-12, other) selected countries, % of total goods exports Czech Republic Lithuania Russia Ukraine

9.  wiiw 9 Source: wiiw Database incorporating national and Eurostat Comext. Exports of goods to the euro area in % of total exports, 2011

10.  wiiw 10 Source: wiiw and European Commission (Spring and Autumn 2012 Reports) for Euro Area. Evolution of GDP growth forecasts for 2012 Forecasts as of February 2012, July 2012 and November 2012

11.  wiiw 11 Evolution of GDP growth forecasts for 2013 Forecasts as of February 2012, July 2012 and November 2012 Source: wiiw and European Commission (Spring and Autumn 2012 Reports) for Euro Area.

12.  wiiw 12 Evolution of GDP growth forecasts for 2012 and 2013 Change of forecasts (February 2012, July 2012, November 2012) Source: wiiw and European Commission (Spring and Autumn 2012 Reports) for Euro Area.

13.  wiiw 13 Source: wiiw (November 2012). GDP growth rates, 2012-2014 201220132014 Kazakhstan5.05.06.0 Latvia 5.33.64.0 Russia3.63.84.2 Slovakia2.82.03.0 Lithuania 2.73.44.0 Poland2.32.12.6 Estonia 2.12.93.9 Albania 1.52.83.3 Romania1.01.53.0 Ukraine1.03.04.0 Bulgaria0.71.52.0 201220132014 Macedonia-0.61.01.7 Bosnia and Herzegovina-0.70.82.0 Montenegro-1.01.02.0 Czech Republic-1.20.82.0 Hungary-1.30.52.0 Serbia-1.51.02.0 Croatia -1.81.02.0 Slovenia-2.0-1.50.5

14.  wiiw 14 2009201020112012201320142015 Household final consumption+ 51014111416 - 11625200 Government final consumption+ 10899121315 - 6877431 Gross fixed capital formation+ 161191416 - 151057200 Trade balance+ 169811966 - 0785710 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.

15.  wiiw 15 Post crisis - the predicament of Europe’s ‘periphery’  In many countries (Southern and Eastern periphery) high debt levels of private sectors (both corporate and households) – deleveraging processes; public sector debt has significantly increased  Foreign banks in retrenchment – credit constraints severe; cross- border banking goes through a process of re-nationalisation  Current accounts adjusted strongly – mechanisms different in fix- and flex-exchange rate countries; in a range of economies strong legacy of distorted tradable/non-tradable sector structures  FDI and inward capital flows sharply down

16.  wiiw 16  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

17.  wiiw 17  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)

18.  wiiw 18  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

19.  wiiw 19 Source: wiiw (February 2013), European Commission (Autumn Report, November 2012) for EA. GDP growth rates 2012 and forecasts for 2013 - 2015