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Economic and Financial Benefits and Challenges from Eastern Enlargement

Economic and Financial Benefits and Challenges from Eastern Enlargement. Krisztina Vida PhD Institute for World Economics, Budapest TEPSA-METU CONFERENCE Brussels, 3-4 March 2009. Structure of the presentation. Macroeconomic snapshot Movement of goods Movement of capital

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Economic and Financial Benefits and Challenges from Eastern Enlargement

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  1. Economic and Financial Benefits and Challenges from Eastern Enlargement Krisztina Vida PhD Institute for World Economics, Budapest TEPSA-METU CONFERENCE Brussels, 3-4 March 2009

  2. Structure of the presentation • Macroeconomic snapshot • Movement of goods • Movement of capital • Movement of workers • Impact on the EU budget • Conclusions

  3. Macroeconomic benefits • Structure of NMS GDP: • similar to OMS (in general)→ • +/-72% services, 25% industry, 3% agriculture • GDP growth trends: • more dynamic in NMS in 2004-2008: • OMS average = 2% • NMS average = 6% • Eurozone membership: • 2 of the 10 (4 of the 12) NMS joined • Real convergence: • catching up of NMS has been spectacular in 2004-2008: • from 55% to 63% of EU27 average • Nominal convergence: • macroeconomic adjustments of NMS preparing for the Eurozone is going on: • public finances in general in good shape or improving • monetary stability issues: stabilization effect of ERM II (4 NMS out of 8 in ERM II)

  4. Macroeconomic challenges • Size of NMS compared to OMS: • population: 21% • GDP: 7% = weaker, less productive economies (36-84% of EU-average, although catching up steadily) • Structure of NMS GDP: • RO+BG: ca. 25% agricultural sector! • ca. 19-40% of “informal” economy! • Living standards of NMS : • still much lower (40-90% of EU-average) = increasing the heterogeneity within the EU thereby weakening it • Macroeconomic adjustments of NMS: • state debts: unproblematic (between one-digit – 45%) with the ex. of HU (73%, diverging) • public budget: problematic in HU (worsening in RO) • inflation: very problematic in Baltics, BG, RO, also in HU, CZ, SI • interest rates: problematic in HU, EE, RO, LV, PL • exchange rate fluctuation: recently problematic in all NMS outside ERM II

  5. Movement of goods • Benefits: • in volume terms: trade has been intensifying • in geographical terms: some restructuring from 1999 to 2007: • share of OMS in NMS exports decreased from 70% to 60% • while share of NMS exports to NMS grew from 13% to 20% • → better balanced trade interdependence for NMS • OMS exports to NMS up from 4% to 7% • OMS export to OMS down from 67% to 61% • in terms of product structure: • generally similar to OMS • Challenges: • huge trade deficits in many NMS (BG, Baltics, RO) → weaker structures of the economy/exports, greater import dependence • too strong dependence within exports on some sectors (e.g. machinery) run by foreign investors

  6. Movement of capital • Benefits: • NMS markets (where privatization has been completed) have been attractive for OMS investors → since 2004 OMS FDI to NMS grew to around 12% in their total capital exports • FDI in NMS: nearly 80% from OMS (mainly DE, NL, AT), bringing about technology and know-how transfer, creating jobs • ca. half of the profit is repatriated to OMS • increasing FDI activities among the NMS too • Challenges appear in the crisis period for NMS: • already settled investments in productive sectors (layoffs...) • already settled investments in non-productive sectors (e.g. real-estate)… • critical relations between OMS parent banks and their NMS subsidiaries… • new investments?...

  7. Movement of workers • Benefits: • employment rates: going steadily up in OMS (despite lower growth) • unemployment rates: going steadily down in NMS (+ some improvement in employment rates) • migrant workers from NMS well absorbed in OMS • remittances by migrant workers to NMS accounts • Challenges for NMS: • social challenges for families of migrant workers • labour force shortages in some regions, sectors • negative impact on age structures • challenge of brain-drain • crisis period: partial return home of migrant workers, but will they have jobs now?...

  8. Impact on the budget • Benefits: • enlargement did NOT necessitate increased size of EU budget → the ceiling of revenues remaining at 1.24% of EU GNI • CAP expenditure is gradually increasing in NMS until 2013 (with national top-ups) • Cohesion expenditure is amounting to av. 3.5% of GDP of each NMS • absorption capacity of NMS steadily improving (for 2004-06 resources a 100% spending is expected by the Commission) • OMS enjoying a longer phasing out • Challenges: • NMS absorption capacity likely to be challenged due to co-financing in the period of crisis and preparations for the euro • “golden period”: of 2007-13 for NMS, unlikely to continue after 2013

  9. Conclusions • Benefits of enlargement in “peace times”: • macroeconomic stabilization trends • intensification of trade and more balanced geographical patterns • OMS FDI activities in NMS contributing to growth • NMS workers well absorbed in OMS • no “painful” impact on the budget for OMS + • substantial value added for NMS development • Challenges of enlargement in crisis times: • backlashes of unbalanced dependence of NMS on OMS investors in the financial + productive sector • highlighting the economic/structural weaknesses of many NMS • → greater number of heterogeneous MS may facilitate fragmented answers to the challenges of the crisis → • all this is weakening the EU…

  10. Thank you for your attention! Merci de votre attention! Teşekkürler!

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