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Central and eastern Europe: Outlook and expectations for the next 18 months Matthew Sherwood

Central and eastern Europe: Outlook and expectations for the next 18 months Matthew Sherwood Senior editor/economist Deputy, Country Risk Services June 2002. Topics. Economic forecasts Business environment EU accession. Central Europe is looking good.

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Central and eastern Europe: Outlook and expectations for the next 18 months Matthew Sherwood

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  1. Central and eastern Europe: Outlook and expectations for the next 18 months Matthew Sherwood Senior editor/economist Deputy, Country Risk Services June 2002

  2. Topics • Economic forecasts • Business environment • EU accession

  3. Central Europe is looking good • Central European growth weathers the EU slowdown • Inflows of FDI fueling growth, productivity and restructuring • Fiscal deficits remain a concern • Current-account deficits also a potential problem • Inflation heads towards convergence with the EU

  4. Respectable GDP growth % real change Source: EIU Country Data

  5. Budget deficits boom % of GDP Source: EIU Country Data

  6. Inflation: towards convergence av % change Source: EIU Country Data

  7. Twin deficit problems return? % of GDP Source: EIU Country Data

  8. Inflows of FDI remain strong US$, bn Source: EIU Country Data

  9. Per capita FDI paints another picture US$ Source: EIU Country Data

  10. Eastern Europe is left behind? • Growth is no longer a problem • Budgets actually look good • Inflation has yet to be tamed • Current-account balances: “left-outs” versus the former Soviet Union • Where’s the foreign investment?

  11. Strong growth in eastern Europe GDP, % real change Source: EIU Country Data

  12. Budget balances: a mixed performance % of GDP Source: EIU Country Data

  13. Inflation: Much to be done CPI, av % change Source: EIU Country Data

  14. Current-account balances % of GDP Source: EIU Country Data

  15. Per capita FDI inflows remain paltry US$ Source: EIU Country Data

  16. EU enlargement: What could go wrong? • Enlargement in 2004: The dates • Developments to watch • negotiations run late • Ireland rejects the Nice treaty • public opinion turns against enlargement • Risk scenarios • Implications for euro-zone accession

  17. The Commission’s Road Map Accession End of negotiations Start neg. Helsinki 6 EP election Ratification & referenda Start neg. Luxembourg 6

  18. Danger points Ireland rejects Nice treaty again Negotiationsrun late Accession? Start neg. Helsinki 6 Accession End of negotiations Ireland rejects Nice treaty Start neg. Luxembourg 6 EP election Ratification & referenda Accession treaty opposed EU accession rejected

  19. Negotiations: The status quo • Agreements on most policy “chapters”, including migration, environment, competition, tax… • Money issues left to the end: farm aid, regional subsidies • Implementation & enforcement lagging

  20. What is behind the budget row?AC-10 as % of EU-15

  21. CAP: Farm subsidies to be phased in over ten years Starting at just 25% of EU Rural development spending only 10% of CAP budget No final EU position until after German election New members could be net contributors to EU budget? Structural funds: Regional aid phased in over three years All AC-10 eligible for regional aid (per capita GDP < 75% EU av.) Aid flows capped at 4% of GDP Big budget row postponed until 2006? What’s behind the budget row? -2-

  22. Nice treaty • EU summit in Nice in 2000 agrees on institutional changes necessary for enlargement: • adjustment of voting weights in the Council of Ministers • reducing the number of portfolios (and Commissioners) in the Brussels bureaucracy • Ireland rejects Nice treaty in June 2001 • May do so again in second referendum in October/November 2002

  23. Scenario 1 Institutional provisions pasted into the Accession treaty Accession treaty ratified But: Political setback at a time when enl. talks are in their “hot” phase Loss of political momentum, Euroscepticism Accession likely to be delayed Scenario 2 Institutional questions handed over to the Convention, which prepares the next Intergovernmental Conference (IGC) ICG concludes in 2004? New treaty ratified by 2005? Enlargement 2006 or later? What happens if Ireland says no?

  24. Public opinion: The EU-15 • Accession treaty needs to be ratified by 15 EU parliaments (and EP) • A majority is against EU enlargement in France, Austria, Germany... • Fears of migration despite 5-7 year transition period • Rise of the far right could further complicate accession talks or draw out ratification process

  25. Public opinion: EU-15Is EU enlargement beneficial?

  26. Public opinion: The candidates • Accession treaty needs to be ratified by parliaments • Most (all?) EU candidates will hold referenda on EU accession after the end of the accession negotiations • Public opinion is still in favour of EU accession in most countries • Rising Euroscepticism • Resentment against EU attempts to get enlargement “on the cheap”

  27. Public opinion: The candidates

  28. Risk assessment • Negotiations run late (high risk) • Ireland rejects the Nice treaty (high risk) • Public opinion turns against enlargement (moderate risk) • High risk that EU enlargement will be delayed until 2005 • Moderate (but growing) risk of longer delays • Euro-zone membership in 2006-2007 unlikely

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