ESTONIA: 5 years in the EU Conference 30 April 2009 Estonian National Library, Tallinn

1. ESTONIA: 5 years in the EUConference30 April 2009Estonian National Library, Tallinn 5 Years of an Enlarged EU* Filip Keereman (Head of unit ECFIN.G.3) *Prepared with the help of Rajko Vodovnik 1

2. Outline • Economic Achievements • NMS • OMS • EU as a whole • Growth drivers • Challenges Ahead • Interlinkages and Outlook • Economics Policies for Addressing Challenges • Conclusion 2

3. Five years of an enlarged EU • Workshop in November 2008, Economic Papers: http://ec.europa.eu/economy_finance/publications/publ_list24809.htm • Report on the ECFIN web site :http://ec.europa.eu/economy_finance/publications/publication_summary14081_en.htm • Conference in Prague, March 2009 http://www.eu2009.cz/scripts/modules/diary/action.php?id=302 • Informal ECOFIN, 3-4 April, Council Conclusions 4-5 May 3

4. ? Economic Achievements – NMS:Considerable catching-up and improved living standards 4

5. Estonia: • Income was 37% of OMS income in 1999; increased to 60% in 2007. • Yearly average of exports of goods and services • before enlargement, 99-03 : • EUR 5.2 bn; average yearly growth rate: 10.9% • after enlargement, 04-08 : • EUR 10.0 bn; average yearly growth rate: 15.2% • 50.000 new jobs have been created after the enlargement • Unemployment rate: • 1998: 9.2% • 2008: 5.5% 5

6. New Member States have benefited from improved employment opportunities at home and abroadAt present juncture: concerns about return migrants replaced brain drain Workers’ remittances: not negligible in some countries Mobility rates by sending country, 2007 6

7. Economic Achievements – OMS: Old Member States with strongest ties to new benefited most Trade with the new Member States and economic growth of the old Member States FDI stocks in the new Member States and economic growth of selected old Member States 7

8. Overall, smooth labour market developments Recent intra and extra EU movers and the resident population Migration: UK top destination 8

9. New investment and export opportunities for old Member States, securing jobs and growth at home • Increased trade growth of old Member States after the 2004 enlargement compared to the preceding five-year period • The old Member States run a trade surplus with the new Member States • Benefiting from complementarities: EU wide production networks are more competitive and increasing trade in intermediate goods • Specialisation risk can be “insured” with trade in assets, specifically acquiring ownership of foreign enterprises 9

10. Economic Achievements – EU as a whole: Has enlargement from 15 to 27 countries strengthened the EU? Opinions on enlargement 2008 10

11. Growth drivers:Institutional convergence 11

12. New product market regulation (more competition, less state aid) Total state aid Perceived development of competition 12

13. Increasing trade integration Geographical destination of exports of new and old Member States 13

14. Geographical destination of exports of Estonia 14

15. Trade balance of Estonia in 1999-2008 15

16. Large degree of openness of NMS Market integration in the new Member States 16

17. Rapid economic modernization, e.g. increased knowledge intensity Exports of high technology products 17

18. Export market shares of new and old Member States 18

19. Export market share after EU accession (extra-EU) 19

20. Strong investments inflows Inward FDI in the new and old Member States 20

21. Inward FDI in the new Member States and Estonia according to its origin 21

22. The ease of doing business and FDI in the EU Member States 22

23. Cohesion policy implementation Net EU transfers and GDP per capita in 2007 GDP effects of Cohesion & Structural Fund programmes 23

24. Challenges Ahead:Strong dependence of some NMS on foreign loansStrong vulnerability of some OMS vis-à-vis NMS Claims of selected old Member States on new Member States, 2004-2008 External loans of BIS reporting banks in 2004 and 2008 24

25. Macro-financial vulnerabilities: Financial over-exuberance threatens catching-up achieved 25

26. Interlinkages and OutlookDifferent sectoral links can be indentified Sectoral contribution to growth in selected regions 26

27. Increased business cycle synchronisation between new and old Member States aggregate 27

28. Strong correlation also in high frequency data Monthly Production Index yoy change Industrial Confidence Indicator, monthly 28

29. …but there are country difference Monthly Production Index yoy change Industrial Confidence Indicator, monthly 29

30. Structural differences in production structure Output composition in nominal terms Latest PL data from 2005, LV+LT from 2006 30

31. Q on Q GDP growth and industrial confidence indicator, 2008 31

32. A halt in the catching-up is forecast: will it be temporary ? 32

33. Policies to Address Challenges • Fiscal policy and SGP • Lisbon Strategy • Enhanced country surveillance • EU cohesion policies • EU financial institutions: European Investment Bank, European Bank for Reconstruction and Development • Balance-of-Payments Facility Policy advise Financial support 33

34. EU cohesion policies • Estonia: Fin. Perspectives 08-13: 4.9% of GDP on average per year (EUR 0.8 bn, 2008 prices); in net terms 3.9% of GDP (after contribution to EU budget)2007: 2% of GDP (EUR 0.3bn, 2008 prices) in net terms Regional distribution of EU transfers, 2007-2013 Note: EAGF : preallocated direct payments only, excluding market expenditure 34

35. EU financial institutions: EIB and EBRD step up lending in framework in of EERP European Investment Bank • EIB: + EUR 15 bn per year in 2009-10 up to almost EUR 70 bn per year in EU, pre-accession and neigbourhood • Of which about EUR 12 bn in NMS per year (increase by EUR 2.5 bn per year) • Focus on SME (via commercial banks) up to EUR 7.5 bn per year (+ 50%) • Focus on energy, climate change, infrastructure 35

36. European Bank for Reconstruction and Development • Increased lending capacity by 20% to EUR 7 bn 2009 • Target financial sector in emerging Europa (and Asia) • Special attention for trade: Trade Facilitation Programme (+ 1.5 bn to guarantee to traded “Vienna Initiative” (February 2009): EIB, EBRD, World Bank Group • EUR 24.5 bn for Eastern Europe in 2009-10 • Co-ordinated financial assistance (equity, debt finance, credit lines) via banks to support lending in particular SME 36

37. EU balance of payments assistance Context (contribution to multilateral effort) • EU: facility increased from EUR 12 in 1988 when the instrument was created to EUR 25 bn in December 2008 and to EUR 50 bn (Commission proposal, April 2009 – Council adoption, May 2009) • Programme based (about 2 years); disbursement in several instalments on respect of conditionality • EU uses its AAA rating to borrow in the market and on-lends to Member State without costs • Loan to be reimbursed in about 5 years Hungary: 4 November 2008 Council Decision • EUR 6.5 bn, in total EUR 20 bn (12.5 from IMF; 1.0 from WB) • First instalment: EUR 2 bn (December 2008) • Programme adapted in light of worse economic situation • Second instalment: EUR 2 bn (March 2008) 37

38. Latvia: 20 January 2009 Council Decision • EUR 3.1 bn, in total EUR 7.5 bn (1.7 from IMF; 0.4 from WB; 1.9 from SE, DK, NO, EE; 0.4 from EBRD, PL, CZ) • First instalment: EUR 1 bn (February 2008) • Programme adapted in light of worse economic situation Romania: 21 April 2009 Commission proposal • EUR 5 bn, in total EUR 20 (13 from IMF, 1.0 from WB, 1.0 from EIB, EBRD) • Council adoption planned for 5 May 2009 38

39. Conclusion • Enlargement has been a great success for all Member States. • However, the achievements cannot be taken for granted: further reforms are essential to maintain them and ensure continued integration and income convergence in the EU. • The current crisis may not only pose challenges but also offer opportunities for implementing deep growth-enhancing reforms. 39