Peter Havlik The Vienna Institute for International Economic Studies (wiiw) September 2010

1. Impacts of the global crisis and future growth challengesStrategie Evropa 2020 jako reakce na krizi: cesty k posílení ekonomického rustu a konkurenceschopnosti Peter Havlik The Vienna Institute for International Economic Studies (wiiw) September 2010

2. Growth model, global crisis and the Strategy Europe 2020Key points: Growth model: liberalization and integration Global crisis: transmitted via the growth model Strategy Europe 2020: a revival of Lisbon ?

3. Key features of the (old) growth model: significant internal and external liberalization (trade flows, capital transactions, financial market integration) targeted at integration with the EU area benefits: capital inflows (FDI), trade integration, ‘technology’ transfer; institutional convergence the model worked - ‘convergence process’ – but structural (and sometimes unsustainable) imbalances emerged

4. Trade balance of goods and services, in % of GDP NMS-5 (CZ) Baltics SEE NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001). Source: wiiw Annual Database incorporating national statistics, Eurostat. Source: wiiw Annual Database incorporating national statistics, Eurostat.

5. Income catching-up: per capita GDP at PPPProjection assuming a 50% growth differential with respect to EU-27 after 2013 (compared to the average growth differential in the period 2000-2008) EU-27 average = 100

6. Three transmission channels of the crisis: • I. Collapse of demand for imports from the region • => collapse of exports • => collapse of industrial production • => collapse of oil and metals prices (RU, UA, KZ) • II. More difficult credit financing for households, companies and government after September 2008 (Lehman Brothers exit) • III. Hardly any counter-cyclical economic policy measures of the state (except Russia, Kazakhstan and Poland)

7. Collapse of exports after Sept. 2008in EUR, January 2007 = 100 Quelle: wiiw-Monatsdatenbank.

8. 140 120 NMS OMS EU-27 100 IT GR 80 HU PT DE 60 FR AT NL UK EU-27 -15 -12 -9 -6 -3 0 3 6 9 IE 40 SE ES DK CZ 20 LV SK SI BG RO EE 0 Budget deficit and public debt, 2008 in % of GDP (Maastricht criteria) High public debt Unsustainable Public debt (< 60%) Maastricht compliant High fiscal deficit Fiscal deficit (< 3%) Source: wiiw Database based on Eurostat.

9. NMS OMS EU-27 IT PT IE HU UK EU - 27 FR AT DE ES NL PL SE SK LV SI CZ LT DK RO BG EE Budget deficit and public debt, 2010 in % of GDP (Maastricht criteria) High public debt Unsustainable 140 GR 120 100 80 Public debt (< 60%) 60 -15 -12 -9 -6 -3 0 3 6 9 40 20 0 Maastricht compliant High fiscal deficit Fiscal deficit (< 3%) Source: European Commission forecast.

10. Strategy Europe 2020 Raising the employment rate of the population aged 20-64 from the current 69% to 75% Raising the investment in R&D to 3% of the EU's GDP Meeting the EU's '20/20/20' objectives on greenhouse gas emission reduction and renewable energies Reducing the share of early school leavers from the current 15% to under 10% and making sure that at least 40% of youngsters have a degree or diploma Reducing the number of Europeans living below the poverty line by 25%, lifting 20 million out of poverty from the current 80 million.

11. Employment by skill groupsaverage changes 2000-2007, 2008 and 2009, in % EU-27 CZ HU PL SK RO Source: Eurostat, wiiw calculations.

12. ULC growth and contributions of main components, average annual changes in %, 2005-2010‘Fixers’ BG EE LV LT SK SI AT Source:wiiw Annual database incorporating national statistics and Eurostat.

13. ULC growth and contributions of main components average annual changes in %, 2005-2010‘Floaters’ CZ HU PL RO RU UA Source:wiiw Annual database incorporating national statistics and Eurostat.

14. Exchange rates Flexible exchange rates have supported sustainable current account deficits ‘Floater’ countries had a less costly adjustment to the crisis (lower employment losses) Nominal depreciations improve competitiveness and support growth once external demand recovers Fixed exchange rates tend to mandate procyclical fiscal policies during the crisis and in the medium run EMU membership may not protect against real exchange rate misalignments Flexibility helps – especially in times of crisis

15. Constraints following the crisis: External factors: higher risk assessment of the region; more difficult external (and internal) financing; reduced growth expectations in the most important export markets; tougher to join the eurozone (new OCA debate)

16. Constraints following the crisis: Internal factors: ‘Deleveraging’ of private sector, increased propensity to save; more limited room to manoeuvre for fiscal policy; weaker and more cautious banking sector; very differentiated processes of real exchange rate adjustments

17. Some tentative conclusions EU and national policies should be reformed in order to improve “economic governance” in order to benefit from trade and financial integration regulation is needed to deal with external and domestic imbalances measures to improve competitiveness needed (Strategy Europe 2020) depending on the types and severity of imbalances, the speed to full integration should be calibrated (“flexibility” helps) depending upon country-specific circumstances, the ‘integration model of growth’ must be adjusted but not abandoned

18. Selected references: ‘Will Exports Prevail over Austerity?’ wiiw Current Analysis and Forecasts, No. 6, July 2010, Vienna ‘Whither Growth in Central and Eastern Europe? Policy lessons for an integrated Europe’ Policy Report written by the Bruegel-wiiw Expert Group, Vienna and Brussels, June 2010 Atoyan, R., (2010), ‘Beyond the Crisis: Revisiting Emerging Europe’s Growth Model’, IMF Working Paper 10/92 Havlik, P., (2010), ‘Unit Labour Costs, Exchange Rates and Responses to the Crisis’, wiiw Monthly Report No. 7/10, July Haddad, M., Harrison, A., Hausman, C., (2010), ‘Decomposing the Great Trade Collapse: Products, Prices, and Quantities in the 2008-2009 Crisis’. NBER Working Paper No. 16253, August IMF-ILO, (2010), ‘The Challenges of Growth, Employment and Social Cohesion’. Discussion document prepared for joint IMF-ILO conference, September