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Conference of the Armenian International Policy Research Group

THE ROLE OF THE EU IN SUPPORTING EMERGING ECONOMIES IN COPING WITH THE CRISIS. European Commission Directorate General for Economic and Financial Affairs (DG ECFIN). Conference of the Armenian International Policy Research Group 7 - 8 of July 2009, Yerevan, Armenia.

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Conference of the Armenian International Policy Research Group

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  1. THE ROLE OF THE EU IN SUPPORTING EMERGING ECONOMIES IN COPING WITH THE CRISIS. European Commission Directorate General for Economic and Financial Affairs (DG ECFIN) Conference of the Armenian International Policy Research Group 7 - 8 of July 2009, Yerevan, Armenia

  2. The crisis has spread worldwide through economic and financial linkages. It is truly global in character. • However, the effect differs depending on structural characteristics and policy responses.

  3. Global economy in recession, led by advanced economies…. 3

  4. ..including the EU. 4

  5. The crisis is having a profound impact on the economies of EU neighbour countries. The direct impact on Mediterranean neighbours appears to have been more muted, reflecting their more closed structure, relatively conservative financing pattern and also due to the rebalancing of Gulf region investment that helped cushion the shock. 5

  6. Effects of the Crisis: GDP. 6

  7. The eastern neighbours have felt the impact of the crisis more directly than Mediterranean neighbours. The same transmission channels of the global downturn brought to a halt a full decade of strong growth in the east neighbours, which was the second fastest growing area on the planet. The region will be in recession in 2009. 7

  8. Effects of the Crisis: East neighbour countries GDP. 40 35 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 -5 -10 -15 Armenia Azerbaijan Belarus Georgia Moldova Ukraine GDP Weight Average 8

  9. East neighbour countries: Exchange Rates 9

  10. East neighbour countries: Reserves 10

  11. East neighbour countries : CAB Azerbaijan 11

  12. East neighbour countries : Debt and Deficit 12

  13. East neighbour countries : Banks’ Exposure 13

  14. Policy responses to the global crisis: East neighbour countries 14

  15. EU Policy responses to the crisis • Rather similar to the ones taken by East neighbour countries. Underlines the commonality of the shock (forecast –4% GDP fall in 2009 for the EU/euro area) and its diagnoses. • Liquidity provision, monetary easing in a concerted, joint policy action. Liquidity provision by the ECB has been extraordinary in size and scope (more than 15% of GDP); implementation of non-standard measures. Provision of USD through swaps agreements to non-members of the Euro-area. • Government action to strengthen the balance sheet of banks, in order to stabilize the banking system. Governments provided massive support to banks: euro area banks have received € 113 bn of capital injections, and € 300 bn of government guarantees. Also asset relief schemes; removal of impaired assets. Member states measures effected for the banking sector amounted to 12% of GDP in Euro area. 15

  16. EU Policy responses to the crisis • Strengthening of the financial facility to support MSs in difficulties. Economic support in the balance of payments has been decided for Hungary (€ 6.5 bn, 1.1% of GDP), for Romania € 5 bn, 4% of GDP) and for Latvia (€ 3.1 bn, 14% of GDP) • EU leaders agreed on the principles for an unprecedented concerted action in the EU: the European Economic Recovery Plan (EERP) which consists of macroeconomic policies for the stimulation of aggregate demand. • Fiscal was stimulus in a coordinated way by the EU. It amounts to 3% of GDP including automatic stabilizers. No ‘one size fits all’. Measures are to be timely, targeted, and temporary. Plus structural stimuli measures for four broad categories: labour markets (20%), businesses (30%), research and investments (30%) and household income (20%).

  17. EU Policy responses to the crisis • Commission-led initiative to invest 5 bn euros in key energy and internet infrastructure projects in 2009-2010. • Front-loading of structural funds / 6 bn euros • De Larosiere Report: reform of EU’s financial supervision. The report was submitted in February 2009 containing 31 recommendations. Among them, the creation of an EU Systemic Risk Council responsible for macro-prudential supervision in the EU. Legislative proposals by the Commission are expected to follow. • Global actions: G 20. 17

  18. EU Policy responses to the crisis • Exit strategy (out of fiscal stimulus packages) – secure sustainability of public finances. Get back to medium term fiscal targets as soon as possible. Full implementation of the Stability Pact. • Preservation of the Single market / application of state aid rules / avoid unfair competition among all EU Member States and EU partners / avoid protectionist measures. • Intensifying the economic dialogue with our neighbour countries. • Participation to the increase of IMF resources which is the core international institution in providing emergency funding. 18

  19. EU support to neighbour countries • Regular instruments • Preserving economic stability in the neighbours of the European Union is a key goal of the EU. • Under the regular (i.e. programmable) EU financing instruments the EU provides financial support having clear macroeconomic features. • These regular financing instruments are: the Instrument for Pre-Accession (IPA) designed for the pre-accession countries and European Neighbourhood and Partnership Instrument (ENPI) for the Eastern Partnership countries. • IPA has provided extended Community support to pre-accession countries, mainly project / programme technical assistance. 19

  20. EU support to neighbour countries • Budget support under the ENPI forms the second instrument of EU support to Eastern Neighbourhood countries. In principle is targeted to specific sectoral programmes rather than project financing or technical assistance. • The Twinning and the Taiex instruments are also cooperation tools between a public administration in a partner country and the equivalent institution in an EU Member State. • The overall allocation for the ENPI instrument amounts to almost €12 billion for the period 2007-2013. • Around 90% of ENPI funds will be used for bilateral actions, i.e. country-specific initiatives and for regional actions involving two or more partner countries. 20

  21. EU support to neighbour countries • The remaining 10% of ENPI funds are reserved for specific new areas of joint activity, namely cross-border cooperation (CBC) with € 1.1 billion reserved for 2007-2013, and specific initiatives like the Neighbourhood Investment Facility (NIF) with € 700 million reserved for 2007-2013. • Between 2007 and 2010 spending of ENPI has been designed as follows: Armenia € 98.4 million; Azerbaijan € 92 million; Georgia €120.4 million (additional funding up to € 500 million will be available to cope with the consequences of the war in Georgia in August 2008), Moldova € 209.7 million; Ukraine € 494 million. • Under the Eastern Partnership initiative, total assistance for the six Eastern neighbours will gradually grow from € 450 million in 2008 to € 785 million in 2013, an increase of nearly 75%. 21

  22. EU support to neighbour countries • Crisis instrument • Unlike the regular instruments of EC financial co-operation (IPA and ENPI), Macro-financial assistance (MFA) to non-EU countries has for the past two decades been an important Community crisis response instrument. • It is a short-term crisis management instrument granting financial assistance in response to exceptional external financing needs in the balance of payments that are to a large extent – notably in the present crisis – exogenous. • MFA accompanies IMF programs therefore it provides key support to address residual external financing needs. For this reason the existence of an IMF program and a smooth cooperation with the IMF are important for the launching of an MFA operation. 22

  23. EU support to neighbour countries • Financing is provided in support of the implementation by the recipient of the adjustment and short-term reform measures designed to remedy the temporary difficulties. Therefore MFA operations may integrate specific EU economic policy conditions reviewed before the payment of each instalment of the assistance. • The mixed nature of MFA (possibly combining loans and grants) allows the assistance to be tailored according to the specific macroeconomic circumstances of the beneficiary country. In particular, when deciding on the mix of loans and grants, the capacity of the recipient countries to service its debt is taken into account along with other criteria arising from the EU legislation know as the ‘Genval criteria’. 23

  24. EU support to neighbour countries • The total amount of MFA operations for the period 1990-2008 amounted to € 5.2 billion out of which € 770 million were grants. 24

  25. EU support to neighbour countries • Several MFA operations were applied to 23 countries in total for the period 1990-2008. 25

  26. EU support to neighbour countries • MFA operations are in principle time consuming to put in motion, as each operation is a stand-alone legislative proposal requiring several stages (including Member states consent, and European Parliament hearing) before its actual enactment by the Council of Ministers. • The EU is monitoring very closely the economic situation in neighbouring countries and in close cooperation with the IMF and other international organisations is ready to assess any potential scope for future MFA operations. 26

  27. EU support to neighbour countries Conclusions • The economies of the east neighbour countries most integrated into the world economy and most liberalised were the hardest hit. This does not imply protectionism and autarky but a need for policies designed to counterweigh the negative shocks arising from (beneficial) greater global integration • The severe crisis has changed near term prospects, but should not be allowed to derail the economic reform process which leads to prospects of sustainable welfare gains in these emerging and developing economies. • Macroeconomic stabilisation factors failed to insulate from the crisis but enabled the countries to implement policies that cushioned initial shocks. Well-designed fiscal policy tools and frameworks plus a consistent exchange rate policy are of particular importance. 27

  28. EU support to neighbour countries Conclusions • Growth models that relied more on primary sectors were seemingly more affected by the downturn, calling for intensified efforts to diversify growth sources. 28

  29. Thank you for your attention! 29

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