Overview What we have seen : achievements Crisis less bad than feared What we can expect : challenges Fragile, slow and varied recovery What should be done : policies for sustained recovery Exit strategies and structural reforms

What we have seen : achievements

Downturn moderated Forecasted versus actual GDP growth in 2009 in EU10, EU15 and Poland, percent Source: European Commission, Eurostat, Central Statistical Offices, World Bank staff calculations

Poland : leading the recovery GDP growth in EU10 countries, year-on-year, percent Source: European Commission, Eurostat, Central Statistical Offices, World Bank staff calculations

Poland : sentiment back to long - term average Economic sentiment indicator for EU10 countries (long term average = 100) Source: European Commission, World Bank staff calculations

External imbalances declined Current account balance as percent of GDP in 2008 and 2009 Source: Central Banks, Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

Risk appetite returned Asset class performance, percent change Source: Reuters, Bloomberg, World Bank staff calculations Notes: *CDS spreads are reversed; ** for real effective exchange rates minus denotes depreciation -400

Poland : risk appetite returned Asset class performance, percent change Source: Reuters, Bloomberg, World Bank staff calculations Notes: *CDS spreads are reversed; ** for real effective exchange rates minus denotes depreciation

Capital inflows rebounded Capital inflows to EU10, USD billions Source: World Bank staff calculations

Poland : capital inflows rebounded Capital inflows to Poland, USD billions Source: World Bank staff calculations

Poland : yield curve normalized Change in yield curve over time, percent Source: Bloomberg, World Bank staff calculations

Rise in unemployment moderated Forecasted versus actual unemployment rates in 2009 in EU10, EU15, and Poland, percent Source: European Commission, Eurostat, Central Statistical Offices, World Bank staff calculations

Lower drop in employment than in output Output vs. employment decline, percent Source: Eurostat, Central Statistical Offices, World Bank staff calculations

What we can expect : challenges

Slow recovery GDP growth in EU10 and EU15 countries pre- and post crisis Source: Eurostat, Convergence and Stability Program Updates from January/February 2010, IMF WEO April 2010, World Bank staff calculations

Varied recovery Forecasted GDP growth in EU10 countries Source: Convergence and Stability Program Updates from January/February 2010, IMF WEO April 2010

Domestic - based recovery Contribution to GDP growth in EU10 in 2009 and 2010 Source: Convergence and Stability Program Updates from January/February 2010

Poland : public investment driven recovery… Gross fixed capital formation, percent change, year-on-year Source: Convergence and Stability Program Updates from January/February 2010

…supported by EU funds… Source: European Commission, OECD Economic Survey for Poland 2010, World Bank staff Distribution of EU funds across the EU10 countries,

…although absorption challenges remain Source: European Commission, World Bank staff Absorption rates of EU structural and cohesion funds across the EU10 countries,

Credit - less recovery Credit growth to non-financial corporations, percent, year-on-year Source: ECB, World Bank staff calculations

Jobless recovery Forecasted harmonized unemployment rates in EU10 countries Source: Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

Jobless recovery – especially for the young… Change in unemployment rate from June 2008 to January 2010 by age (%) Source: Eurostat, World Bank staff calculations

Jobless recovery – … and less educated Change in unemployment rate from 2Q 2008 to 3Q 2009 by education (%) Source: Eurostat, World Bank staff calculations

What should be done : policies for sustained recovery

Financial policy : stabilizing banking system in Western Europe and maintaining exposure to EU 10 region European Banks’ 5-year CDS (bps) Source: Bloomberg, Datastream, World Bank staff calculations

Monetary policy : supportive of recovery… Policy interest rates (percent) Source: Central Banks, World Bank staff calculations

Monetary policy : … also to reduce appreciation pressures … Nominal exchange rates to EUR (Aug 2008=100) Source: Reuters, World Bank staff calculations

Monetary policy : … as long as inflation remains low Overall HICP (percent) Source: Eurostat, World Bank staff calculations

Fiscal policy : gradual unwinding … Forecasted general government deficit in EU10 countries and EU15* Source: Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

Fiscal policy : … to keep public debt sustainable … Forecasted general government debt in EU10 countries and EU15* Source: Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

Fiscal policy : … through both expenditure and revenue - based consolidation … Composition of fiscal deficit reduction from 2009 to 2012, percent of GDP Source: Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

Fiscal policy : … and structural adjustment … Composition of primary deficit reduction from 2009 to 2012, percent of GDP Source: Convergence and Stability Program Updates from January/February 2010, World Bank staff calculations

Fiscal policy : …moving from relaxation to tightening in spite of actual output remaining below potential… Cyclicality of fiscal policy, number of EU10 countries, Source: World Bank staff based on CP updates

Fiscal policy : … to meet Maastricht 3% deficit target Source: European Commission

Fiscal policy : … and join the Euro Area Source: World Bank staff

Structural policy : answering the 1.5% question … Potential growth in and 2012 by EU10 member country Source: Convergence Program Updates January/February 2010, European Commission, World Bank staff calculations.

Structural policy : … requires more people in productive work and working longer … Long-term unemployed (12 months of more) as percent of active population Source: Eurostat, World Bank staff calculations.

Structural policy : … also to boost competitiveness… CAB in Poland and EU10, , percent of GDP Source: Convergence Program Updates 2010, IMF WEO April 2010, staff calculations.

Structural policy : … to close gap to EU average living standards GDP per capita in purchasing power standards, EU27=100 Source: Eurostat, World Bank staff calculations.

For more information visit : www. worldbank. org / eca / eu 10 rer worldbank. org