1. Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at 3rd Craft, Trade and SME Summit Luxembourg, 23-24th April 2004 Accession Countries on the Eve of EU Enlargement Peter Havlik (wiiw) Current economic situation and outlook for the region Income and productivity catching-up in the ACs Challenges of EU accession for the new member states

2. Gross Domestic Product (GDP) annual changes in % against previous year 2 5.0 7 2.0 4 1.6 3.2 4.2 4.5 4.0 6.9 6.2 5.4 3.7 3.4 4.5 4 3.5 3.0 1.0 7.3 9.3 0.8 2.8 0.8 4.3 3.9 4.9 4.5 3.7 8.9 7.4 4.8 3.4 2.2 4.0 3.7 2.9 4.0 4.7 5.2 1.1 0.3 1.4 5.2 3.0 4.9 4.8 2.5 6.8 6.1 6.0 2.2 2.9 4.4 1.4 3.5 2.0 Serbia and Montenegro Russia Ukraine EU(15) Macedonia Austria Croatia CEEC-10 Romania Bulgaria CEEC-8 Lithuania Latvia Estonia CEEC-5 Slovenia Slovak Republic Poland Hungary Czech Republic Forecast 2005200420032002 2.2 3 4.6 6.5 2.4 4 3.5 4.1 4.5 4 4.2 6.6 6.2 5.9 3.9 3.5 5 4 3.9 3.5

3. 3 Real per capita GDP in ACs EU(25) average = 100 Note: Projection assuming a 2 percentage points growth differential with respect to the EU(15) after 2003.

4. 4 Productivity in ACs and EU(15) Index 1995=100 Productivity growth in EU(25) will accelerate: +23

5. 5 Productivity in ACs and EU(15) GDP per employed persons, EU(15) = 100, year 2003 Productivity level in EU(25) will drop by 7% after accession compared to EU(15)

6. 6 Consequences of EU accession for ACs: GDP growth Facit:  Genuine growth forecasts now hardly possible  Higher GDP growth expected in the medium and long run  No immediate direct growth effects (year 2004) expected  The recent catching-up processes will continue  European economy slowly recovers from stagnation  highly integrated ACs profit from the EU recovery as well  Accelerated GDP growth after 2005 possible

7. 7 5 8 8 5 2 1.5 8 3 2.2 3.5 2.9 3.5 3 5 2 8 10 7 3 2 11 5 1 4 2.8 4 8 2 6.9 3.5 9.4 13.6 5.2 2.4 1.5 15.3 2.4 -1.2 2.9 1.4 5.6 8.5 0.8 4.7 0.1 16.5Serbia and Montenegro 16.0Russia 0.8Ukraine 1.4Macedonia 2.2Croatia 22.5Romania 5.8Bulgaria 0.3Lithuania 1.9Latvia 3.6Estonia 7.5Slovenia 3.3Slovak Republic 1.9Poland 5.3Hungary 1.8Czech Republic Forecast 2005200420032002 Inflation (consumer prices) annual changes in % against previous year

8. 8 Consequences of EU accession for ACs: Inflation Facit:  Higher interest rates as a reaction to inflationary pressures may pose a break on the future GDP growth  Price levels temporarily increase (except Slovenia)  As a consequence of the harmonisation of Taxes and Tariffs with the EU  The requirement to meet Maastricht criteria will exert a downward pressure on inflation  Adjustments to EU price levels in the Single Market expected in the medium and long run

9. 9 Government deficit (= „-“) in % of GDP Maastricht (3% des BIP)

10. 10 Government debt in % of GDP Maastricht (60% des BIP)

11. 11 Consequences of EU accession for ACs: State budgets Facit:  Expected anti-inflationary measures and government deficit reduction programs may well result in lower GDP growth in the short- and medium run  Revenues from trade tariffs drop  Costs due to the implementation of ‚acquis‘-regulations increase  Contributions to EU budget from 1 May  Co-financing of EU projects and agricultural subsidies  Revenues from project-related transfers uncertain (mainly 2004)  The already high government deficits may well grow  Consolidation requirements may result in more restrictive fiscal politicies

12. 12 FDI stocks in ACs, Ukraine and Russia, 2003

13. FDI stocks in selected accession countries (EUR bn) end-2003, shares of key investing partners in %

14. 14 Unit labour costs (ULCs), exchange rate (EUR) adjusted, 1995 = 100

15. 15 International comparison of unit labour costs PPP adjusted (Austria = 100)

16. 16 Arbeitsproduktivität in der Industrie, MOEL und EU(15), Index 1995=100 +56 MOEL-Industrieproduktivität wächst noch rascher, Beschäftigung geht zurück

17. 17 Consequences of EU accession for ACs: Foreign trade Facit:  Deterioration of trade and current account balances possible  Exports and Imports grow as last trade barriers disappear (especially in agriculture and services trade)  Growing trade also among ACs themselves  Extra-EU Imports increase due to market growth effects  Market services in the ‚old‘ EU remain competitive; outsourcing to ACs only in selected areas

18. 18 Nominal exchange rates, Jan. 2000=100 (national currency vis-à-vis EUR)

19. 19 Preisniveaus, EU(15) = 100

20. 20 Consequences of EU accession for ACs: Participation in ERM II and EMU accession Facit:  Euro accession 2007 at the earliest (EE, LT, LV, SI)  Resp. only after 2008 (CZ, HU, PO, SK)  After initial enthusiasm most ACs are nowadays rather cautious  Only Estonia, Latvia, Lithuania and Slovenia intend to join ERM II immediately after EU accession (2 years ER stability, +/-15% fluctuations permitted)  Poland, Hungary, Slovakia and the Czech Republic will and can join EMU only some time afterwards

21. 21 1515 15 9 8.5 3535 13.5 12.6 7 13 14.2 1 10 14.6 6 19 6 8.2 15 8 9 3636 14 13.4 8 14 14.7 12 10 15.2 6.3 1616 20 6 8.2 14 8.5 9.5 36.7 14 13.0 7.0 14.5 14.6 12.7 10.8 10.0 15.0 6.7 17.4 19.5 5.9 7.8 13.8Serbia and Montenegro 8.0Russia 10.1Ukraine 31.9Macedonia 14.8Croatia 13.8 CEEC-10 8.4Romania 17.8Bulgaria 15.0 CEEC-8 13.8Lithuania 12.0Latvia 10.3Estonia 15.3 CEEC-5 6.4Slovenia 18.5Slovak Republic 19.9Poland 5.8Hungary 7.3Czech Republic Prognose 2005200420032002 Unemplyoment rates (LFS) annual averages in %

22. 22 Unemployment rates by region (%), 2002 0.00 to 5.00 5.00 to 10.00 10.00 to 15.00 15.00 to 30.00 No data

23. 23 Consequences of EU accession for ACs: Labour market and migration Facit:  Labour market will remain the major challenge for the EU in future as well  East-west migration waves are not expected  Lasting high unemployment in most ACs (‚jobless growth‘)  Nevertheless, additional migration flows hardly expected due to existing restrictions and low labour mobility in the ACs  In the medium- and long run, the ACs will face labour market shortages due to low birth rates and aging populations

24. 24 >GDP growth: no immediate direct effects of EU accession, more growth in the medium and long run (assuming ‚good‘ policies), yet exact forecasts are hardly possible >Inflation: temporary price increases, higher interest rates likely >State budget: higher deficits, restrictive fiscal and monetary policies could pose a break on future GDP growth >Foreign trade: exports and imports will grow; trade and current account balances may deteriorate >FDI flows: no boom; privatisation completed, few additional big projects, only greenfield and SME investments will expand >EMU (Euro) accession: 2007 at the earliest (EE, LT, LV, SI) resp. only after 2008 (CZ, HU, PO, SK) Summary conclusions