Labour Market in Central and Eastern Europe in Context of Economic Crisis Jiří Rusnok, Chief Economist, Pension Director, ING Czech Republic ILO, Geneve, June 4, 2009

2 Content: Diversified situation in the CEE region. Diversified situation in the CEE region. Structure of anti-crisis packages. Structure of anti-crisis packages. Risk of excessive government borrowing in CEE region. Risk of excessive government borrowing in CEE region.

ILO, Geneve, June 4, Diversified Situation in the CEE Region Very different macroeconomic situation at the beginning of the crisis – also very different impact across the region Very different macroeconomic situation at the beginning of the crisis – also very different impact across the region Most of the economies (except HU) in CEE grew in recent years by more than 5% of real GDP per year, in 2009 almost all of them will face negative growth Most of the economies (except HU) in CEE grew in recent years by more than 5% of real GDP per year, in 2009 almost all of them will face negative growth Countries with currency board arrangement (pegged FX rate) are in much more fragile situation – labour market and CA deficit more affected, Countries with currency board arrangement (pegged FX rate) are in much more fragile situation – labour market and CA deficit more affected, Mostly small, very open economies – huge impact of dropping international trade Mostly small, very open economies – huge impact of dropping international trade In general, countries with fewer macro-imbalances are much more robust in times of crises. In general, countries with fewer macro-imbalances are much more robust in times of crises.

ILO, Geneve, June 4, Unemployment Rates in CEEC Unemployment Rates in CEEC (according ILO definition) Source:Eurostat CountryMay 08January 09February 09March 09April09 EU (27)6,87,98,18,48,6 EU (15)6,98,18,38,58,7 Bulgaria6,65,35,65,96,2 Estonia3,99,811,112,413,9 Czech R.4,34,95,25,55,7 Hungary7,78,58,89,39,6 Latvia6,213,214,616,117,4 Lithuania4,611,513,515,216,8 Poland7,2 7,57,77,8 Slovakia9,7 10,210,611,1

ILO, Geneve, June 4, Job Creation in Context of GDP Growth in CEEC, Source:Eurostat

ILO, Geneve, June 4, Macroeconic Prediction for CEEC Region Real GDP change Gen.Gov.Bala nce % GDP Public Debt % GDP CA % GDP Inflation CPI Unemployment % CZ-3,5-3,029,4-2,71,08,2 PL-0,7-4,147,7-4,51,811,0 SK-2,1-2,830,0-5,72,011,5 SI-2,7-3,224,8-4,00,56,2 H-3,3-2,973,8-4,04,29,1 RO-4,1-7,521,1-9,04,56,1 BG-2,0-0,512,2-14,12,07,4 EE-10,0-3,26,1-5,7-0,511,8 LV-12,0-6,330,4-6,5-1,010,3 LT-10,03,020,0-7,01,515,7 IMF, Economic outlook, May 2009

ILO, Geneve, June 4, Fiscal Stimulus Packages in CEEC Significantly smaller in size compared to the western Europe and USA, around 1 – 2 % of GDP. Significantly smaller in size compared to the western Europe and USA, around 1 – 2 % of GDP. In majority countries almost no banking crises (except Ukraine, Baltics, partially Hungary). In majority countries almost no banking crises (except Ukraine, Baltics, partially Hungary). Significantly lower affordability of public finance – t Significantly lower affordability of public finance – thus, fiscal policy is both pro-cyclical and hardly sustainable; the latter because it is and will be difficult to finance higher fiscal deficits – need for a coordinated international support. Mostly small and very open economies – effectivnes of domestic fiscal stimulus thus limited. Mostly small and very open economies – effectivnes of domestic fiscal stimulus thus limited. More focus on supply side in order to boost competetivness of national economy More focus on supply side in order to boost competetivness of national economy

Specific Labour Market Measures Active and passive labour market measures are part of regular employment policies in the region. Automatic (embedded) stabilizers are important part of anti-crises strategies The level and effectiveness of these systems is obviously different from one country to another Specific (temporary) new measures: – –Social contributions discount (degressive) for employers, applicable to below average wages (CZ) – –Training programs for employees in case of partial unemployment subsidized heavily from the European Social Fund (CZ. SK) – –Temporary subsidizing of mandatory social contributions in case of shorter working hours due to lack of orders („kurzarbeit“) (SK, PL) – –Flexible working time arrangements (SK, PL)

ILO, Geneve, June 4, Risk of Excessive Government Borrowing in CEE Region Despite that in general the indebtedness of CEEC is not (maybe except HU) as high as average of the EU(15), the perception of the market is much worse – the assistance packages for: Latvia, Hungary, Ukraine, Romania, Serbia, Belarus, Despite that in general the indebtedness of CEEC is not (maybe except HU) as high as average of the EU(15), the perception of the market is much worse – the assistance packages for: Latvia, Hungary, Ukraine, Romania, Serbia, Belarus, Sharp increase in cost of financing of state debts – CDS increased sharply Sharp increase in cost of financing of state debts – CDS increased sharply Longer term fiscal sustainability could be a huge issue. Longer term fiscal sustainability could be a huge issue. Enormous rise of debt service cost within state budgets of CEEC in near future – crowding out effect towards social expenditures Enormous rise of debt service cost within state budgets of CEEC in near future – crowding out effect towards social expenditures

ILO, Geneve, June 4, State Debt, % GDP, forecast 2009 IMF, Economic outlook, May 2009

ILO, Geneve, June 4,

ILO, Geneve, June 4, Closing remarks As far as longer-term prospects for CEEC are concerned, I'm optimistic. Nevertheless, situation will be very different within the region with regards to the overall macroeconomic stability. As far as longer-term prospects for CEEC are concerned, I'm optimistic. Nevertheless, situation will be very different within the region with regards to the overall macroeconomic stability. CEEC which are EU members will have better environment to survive the troubled period and will be less affected than some of other countries. CEEC which are EU members will have better environment to survive the troubled period and will be less affected than some of other countries. These countries have mostly successfully reformed their institutions in recent years, and most have built economies that are diversified and resilient. These countries have mostly successfully reformed their institutions in recent years, and most have built economies that are diversified and resilient. Labour market tensions will grow, double digit unemployment rates will be back in some countries and could stay for a longer time. Labour market tensions will grow, double digit unemployment rates will be back in some countries and could stay for a longer time. The crisis puts them at risk, but even if the slowdown in many of these economies will be deep, change comes naturally to this part of Europe. So they will adjust, possibly better and faster than many of Europe's established market economies. The crisis puts them at risk, but even if the slowdown in many of these economies will be deep, change comes naturally to this part of Europe. So they will adjust, possibly better and faster than many of Europe's established market economies.

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