Download PERC-ITUC Trade Union Forum Minsk 26

The impacts of the economic crisis on
Central-Eastern Europe, policies, trade union
responses
PERC-ITUC Trade Union Forum
Minsk 26-27th October 2009
Béla Galgóczi
ETUI
[email protected]
Structure of presentation
●
Basic facts and prognoses on the downturn in Europe
● Labour market impacts – huge variety across countries
● Factors of vulnerability of Central and Eastern Europe
● Crucial policy question and role of trade unions: who pays
the bill, what principles of burden sharing (international:
debtor/creditor, national: spheres of economy;
capital/labour, within groups of workers
● Flexibility and its different forms (forced and negotiated)
● The role of the IFI-s in CEE
● Some employment policy tools (good practice cases)
● Conclusions
2
Gross domestic product in 2007 and prognosis for
2009 (annual growth)
2007
11
9
7
5
3
1
-1
-3
-5
-7
-9
-11
-13
2009
HU IT DK FR PT DE EA SE BEEU 27UK AT NL MT ES GR CY FI LU IE RO SI BG CZ PL EE LT LV SK
15/16
Data Source: European Commission (2009).
3
Facts on the downturn in I.Q. 2009 – an even
bleaker picture
●
●
●
●
●
●
●
4
The downturn in the first quarter of 2009 was 18.6 % in Latvia, Estonia
suffered a 16% drop and Lithuania 11%.
Only Poland has managed limited growth in the I.Q – showing also that the
region is not equally effected (EBRD Forecast for 2009: +1.3%)
Lithuania 2009 II.Q. GDP figure: with a 22.4% drop (year-on-year) this is
the largest GDP fall ever measured in peacetime Europe
In July 2009 the Latvian government and the IMF reached a financing
agreement on basis of a forecasted 18% GDP decrease in 2009.
Indeed a dramatic picture in the Baltic states
Ukraine is also hit hard – GDP growth 2009: -14% (EBRD, Oct 2009)
Belarus on the hand shows a slight downturn, GDP growth 2009: -3%
(EBRD, Oct 2009 Forecast).
Gross domestic product in IV. Q 2008 and in I. Q. 2009
(year on year basis)
in %
IV.quart.08
5
I.quart.09
-15
-20
Data Source: European Commission (2009).
5
MT
PL
CY
EL
AT
ES
BE
FR
CZ
BG
PT
UK
DK*
HU
LU*
IT
NL
EU27
-10
SK
SE
RO
DE
FI*
SI*
LT
EE
LV
-5
IE*
0
ES
LV
EE
LT
IE
SK
HU
FR
PT
SE
EU27
EL
BE
PL
FI
DE
IT
UK
MT
BG
LU
RO
CZ
SI
DK
CY
AT
NL
Unemployment rate
in %
20
18
16
14
12
10
8
6
4
2
0
6
May 2008
May 2009
Increase in the number of unemployed by Q2 2009,
Q1 2008 = 100
450
400
350
300
250
200
150
DE
BG
RO
PL
AT
SK
I
GRT
NL
BE
PT
FR
M
T
SI
EU FI
27
HU
UK
CZ
CY
SE
LU
DK
ES
IE
LV
LT
EE
100
7
Labour market performance during the crisis: huge differences across
EU member states
While the level of unemployment is highest in Spain, the
increase in one year (Q1 2008 – Q1 2009) was most
dramatic in Estonia (to 400 % of pre-crisis level) followed
by Lithuania and Latvia.
Ireland and Spain with close to 200% are also seriously
effected
Hungary features the EU average
8
Change in GDP, employment and unemployment in DE,
HU, ES – 2009 1Q/2008 1Q
7
5
3
1
-1 DE GDP DE
DE HU GDP HU
HU ES GDP ES
ES
EMPL UNEPL
EMPL UNEPL
EMPL UNEPL
-3
-5
-7
Data Source: European Commission, Eurostat LFS, 2009
9
The vulnerability of Eastern Europe
●
●
●
●
10
Macroeconomic imbalances (deficits in current account,
government debt, household debt and corporate debt)
chronical dependence on external financing (in forms of
FDI, credits (banks and IFI-s), financial investments
(government and corporate bonds, other financial assets)
and a high level of economic and trade integration with the
EU15 (linked to the Western economic cycle)
Effects of labour mobility (return migrants in crisis;
shrinking remittances)
Global deleveraging resulted in fast transmission to emerging markets.
3.0
2007
2.5
Net Capital Inflows to Emerging Markets
(in percent of GDP)
2.0
1.5
1.0
0.5
0.0
11
Past Crises Episodes
Pre-crisis
After crisis
Minimum during crisis
Current Crisis
2009
2010-11
12.5
12.5
9.2
8.4
6.3
7.5
Real GDP growth, 2005 -2010
10.2
7.2
7.5
7.7
4.8
6.3
5.5
5.0
Countries with CA
deficits inferior to 7
percent of GDP
2.5
1.4
2.5
0.6
-1.7
-2.5
-3.1
-2.5
-3.4
-5.4
Countries with CA
deficits superior to 7
percent of GDP
-7.5
-7.5
Baltic countries
-12.5
… as did countries with lower current
account deficit.
-12.5
-15.7
-17.5
-17.5
2005
12
2006
2007
2008
2009
2010
The first phase: the effects of financial turbulences
●
The immediate effect of financial turbulences, frozen
capital flows, paralysed financial markets
●
This phase has ignited wide range fears of collapse or
state bankruptcy in many countries of the region
●
This seems to be over now…
13
The vulnerability of Eastern Europe
●
●
●
●
●
14
Capital flows frozen, financial markets in eastern Europe
dried up, capital retreats to home markets
Devaluation of national currencies (for CEE NMS up to 2025%),
Tensions in countries with pegged exchange rate (Baltic
states, Bulgaria)
Daily debt financing paralysed, credit ratings of CEE
countries downgraded, debt of Ukraine, Latvia, Romania
rated as `junk-bonds`
At the peak of the crisis (March 2009) Ukrainian state
bankruptcy was priced to a probability of 40% shown by
`credit default swap spreads` (CDS); in case of Latvia it
was 10%
The vulnerability of Eastern Europe
●
●
●
●
15
Households and enterprises often indebted in foreign
currency – with debt burdens due to weaker national
currencies and higher banks fees increasing
Families in desperate financial situation – a burning social
problem
The banking sector in CEE is 80% in foreign hands and
foreign banks were often reluctant to bail out their CEE
affiliates
The situation is alarming, mostly in the Baltic states
Non-performing loans in Central Eastern Europe
●
The amount of private credits compared to GDP grew by
200% in the last couple of years in the CEE region.
● Non-performing loans are at alarming levels in most
countries of the region, the stimate of the IMF for the end
of 2009 is the following, by country:
● Estonia 15 %,
● Lithuania 15-20%,
● Latvia 25 %,
● Hungary and the Czech Republic: 5 %
● Poland: 10% (mostly because of enterprise loans)
● Ukraine: 50 %,
● Russia: 30 %.
A potential for further tensions....
16
The second phase of the crisis: the effects of one-sided
and deep economic integration
●
High dependence on foreign capital, investments and
exports to Western Europe makes the region
vulnerable…
●
The second feature of vulnerability has deeper roots
and possibly longer term effects
17
Economic and trade integration with the West as factor of
dependence for CEE
●
●
●
●
18
New member states from Central and Eastern Europe
(CEE), in particular Visegrad Four (V4) countries –
CZ, HU, PL, SK –particularly affected by the crisis due
their high economic and trade integration with
Western Europe, especially DE.
Poland is less exposed due above all to its larger
domestic market and less export dependence
Particlularly effected is the large automobile sector
with its suppliers, including chemical companies (SK
especially).
Baltic states in focus
●
●
●
●
●
●
●
19
The Baltic states are hit hardest by the crisis
A 20% GDP drop is dramatic and involves substantial
sacrifice from the population (as a result of
unsustainable growth strategies in past)
Important is to have a future perspective and a
socially just distribution of the burdens
Non of this is happening with the crisis management
now
Maintaining the currency peg (or board) means
adjustment costs will be more concentrated
Why the public sector is so much under pressure?
Within public sector, why education (that is key for
future)?
Where is Europe in this situation? – no visible strategy
●
●
●
●
●
●
●
20
Europe is paralysed in regard to CEE NMS and EU
neighbourhood countries, as well
Europe in lack of proper institutions and resources to cope with
a crisis of this magnitude
The leading role has been left to the IMF with adverse
conditions
Severe conditions for fiscal tightening – to cut public spending:
Latvia 20% cut of public sector wages, 10% cut of pensions,
social welfare schemes)
Lithuania: 9.5% cut of public sector wages
Hungary: scrapping 13th month wage in public services
Refusal of a crisis intervention fund for CEE countries was a
negative message from the EU to CEE NMS and to the whole
Eastern Europe (beyond the EU)
The role of the IFI-s in the region
EU – IMF
While Europe sets on a wide range of public resources to offset the effect
of the crisis (stimulus packages, labour market schemes, more
government deficit), countries in CEE in the deepest crisis need to
apply brutal fiscal tightening
Europe and the world seem to abandon neo-liberal economic doctrine,
but this is being applied in CEE as crisis management
One thing is however true: restoring sound public finances (budget
and current account deficit) is key
The question is how and in what burden sharing
Role of social partners in finding a just burden sharing would be key
receipee: cut spending at any price > this makes the downturn even
more severe
Even so, it is true that the IMF showed certain flexibility
21
IMF Support for European Countries Affected by the Global Crisis
(As of August 2009)
Country
IMF Loan Size
Hungary

$15.7 billion

November 2008
Ukraine

$16.4 billion

November 2008
Iceland

$2.1 billion

December 2008
Latvia

$2.35 billion

December 2008
Belarus

$2.5 billion

January 2009
Serbia

$0.5 billion

January 2009
Romania

$17.1 billion

May 2009
Poland

$20.6 billion

May 2009 – Flexible Credit Line
Bosnia and Herzegovina

$1.57 billion

July 2009
22
Approval Date
The role of the IFI-s in the region (example Latvia)
With the consequtive downgrading of the growth prospects for LATVIA the
government deficit condition of the disposability of the credit line had
been modified: from 5% of GDP to 7%, then to 10% - this is still a
huge burden a a negativ spiral is threatening!
The IMF showed some flexibility and itself goes through a learning
process as it now supports the abolition of the 23% flat tax (which
was previously welcomed and copied as a competitiveness tool)
A sustainable development track with managable social sacrifices and
without eating up future perspectives (education, health care) is
needed
This is not viable without an active – and controlled – support of the EU
A concept is missing however – it is only fire-extinguishing that happens
23
Challenge for trade unions: what burden sharing in crisis
With 20% drop of GDP burdens are inevitable, but who pays the
bill – a just burden sharing should be the central issue for trade
unions:
- - different levels – national, branch, enterprise
- - national level: macro-economic adjustment (conditions for IFI
intervention, exchange rate policy, policy towards crediting
banks, labour market adjustment /forms of flexibility)
- Learn from bad example: focusing the costs on the public
sphere in Latvia> alternative: tougher policy with crediting
foreign banks> devaluation of currency spreads burdens across
the whole population > leave room for social policy> tax reform
more burden on the wealthier strata (progressive tax+property
tax)
24
Challenge for trade unions: what form of labour market
flexibility
National level: labour market policy; branch and enterprise level:
negotiated forms of flexibility by collective agreements > wage
policy: preserve purchasing power during crisis
Thee main factors of flexibility:
- - General labour market flexibility (EPL)
- - in form of low general level of employment protection
- - or high level of non-standard (precarious) jobs
- - irregular forms of flexibility (non-payment of wages, informal
economy) – strong role in CEE/SEE
25
-
- Specific labour market tools to cushion the impact of the crisis
(good practices, first of all Germany)
-
- Role and strength of social actors to exploit internal flexibility at
plant level (collective bargaining)
Shortened working time scheme in Germany: the good
practice case in Europe
Germany: two main levels of responses:
Labour market (LM) policy instrument short-time work = ‚Kurzarbeit‘
(`Kurzarbeit Null`):
State subsidy of wages for inactive workers or employees working shorter
hrs than stipulated in coll. agreements
Recent changes: period of entitlement extended to 18 months (open to a
further extension to 24 months); temporary agency workers included
Yearly average stock for 2009: 1.2 Mn employees (forecast October 2009)
Collective agreements (sectoral, company-level) on
flexibilisation/reduction of working time (WT), e.g. ‚flexible WT
accounts‘ at Volkswagen;
●
Advantages:
Workers remain in employment
Possibility of voc. training (funded by Public Labour Agency)
26
Trade union focus on proper forms of flexibility
●
27
Given the weakness of labour relations and actors in the
region,
more emphasis needs to be given to public labour market
schemes to cushion the impact of the crisis on employment
(learn from good practices, e.g Germany /`Kurzarbeit`/ Italy
: `cassa integrazione`)
The EU should also support such schemes in the region
Fight against irregular forms of flexibility, above all against
the non-payment of wages and the spread of precarious
work
Collective agreements on branch and company level:
exploit internal flexibility in order to avoid dismissals
`Lessons` drawn from the crisis in the region
Europe and the world seem to abandon neo-liberal economic doctrine,
but this is being applied in CEE as crisis management
Hungary: `more neo-liberalism needed`, lesson drawn from vulnerability
during crisis: `down with the welfare state!`
Failure was the lack of ability to integrate low skill, disadventagious
employee groups on the labour market
Slovakia: success with liberalisation, neoliberal policies, however a
vulnarable – mono-industrial stucture, Eurozone accession at an
overvalued exchange rate; high export dependance – still neoliberal
foundations not questioned;
Baltic states: the real disaster, but no systemic response, just austerity
based adjustment, above all cuts in the public (service) sector; the
only remarkable step: abolishing the flat tax rate system in Latvia
(proposed also by the IMF)
This is a mixed picture, no systemic conclusion, no considerations about
a sustainaable future convergence strategy
28
Conclusions
Sharp and deep drop in demand – paralysed financial
institutions
● European response: not satisfactory and not properly coordinated
● The leading role in the region left to the IMF
● The current situation perfectly illustrates the adverse
effects of an economic integration without social and
political integration in the EU
● This is also a bad message to EU accession countries and
countries with a future prospect of EU membership
● Weak social welfare systems in the CEE region are being
further dismantled. Perversely the failed neo-liberal
economic doctrine seems to be further strengthened in the
new member states, while developed Western economies
seem to leave it behind.
●
29
Conclusions
●
With the acute financial turbulences (e.g. exchange rates,
capital extraction) over now /really over??/,
● Emphasis must be given to the employment impacts
● Here the worse is still to come and employees in most
CEE and in SEE countries even more are unprotected
● Effective labour market policy is needed
● Just burden sharing is needed
● What sustainable growth model for the region after crisis?
30
Conclusions
●
31
W