1. Crisis Management in the EU and in Hungary GKI Conference 26 March 2013 Alex Lehmann, Lead Economist, EBRD

2. Key points Funding environment will remain challenging, not just from foreign banks but also in terms of FDI Eurozone growth environment of course as well. Cyclical recovery in CEE economies the weakest in transition history. Depressed investment volumes the key worry for trend growth medium term. Shift to domestic demand, and scaling up in technology content of exports Fiscal policy not an option; monetary easing now exhausted, greater exposure to international bond markets a much greater vulnerability Structural reforms hence the key tool for crisis management: credible, comprehensive and designed to illicit the investment response.

3. The short term outlook: a series of downward revisions

4. The pre-crisis boom: in good measure fuelled by domestic investment

5. Now: the weakest component in the recovery

6. Considerable variation between countries

7. FDI inflows sharply reduced compared to before the crisis

8. The pace of European bank deleveraging

9. External funding outflows only partially compensated by local deposit growth

10. Funding conditions improved, though credit standards continue to tighten

11. Structural reform priorities in the CEE: choice picks of OECD and EBRD Slovak Republic: OECD Education system Labour force mobility and participation rates Reduce barriers to competition and entrepreneurship Innovation support framework Poland: OECD Public ownership, product market competition Labour taxes and overly generous social support schemes Transport, communication and energy infrastructure Education system Source: ‘Going for Growth’, OECD, 2013, and EBRD Transition Report, 2012. … and EBRD Education system: skills shortages Private pension funds Private infrastructure funding/PPPs … and EBRD PPPs Regulation to sustain banking sector integration Local capital market development

12. … and in Hungary OECD Reduce taxes on labour Labour force participation, esp. at old age Education system, esp. tertiary Business regulation and competition, esp. network industries Public sector efficiency Source: ‘Going for Growth’, OECD, 2013, and EBRD Transition Report, 2012. … and EBRD Stable regulation and tax regime for banking sector Labour force participation Credible macroeconomic policies and outlook

13. Launching structural reforms in the midst of a recession? Involve all stakeholders Get buy in from financial sector to stimulate investment response Medium term programme and credible communications Design package to off-set individual elements: e.g. product market competition and labour market liberalisation