Download REVIEW OF THE LITHUANIAN ECONOMY IN THE CONTEXT

REVIEW OF THE LITHUANIAN ECONOMY IN THE CONTEXT
OF EUROPEAN UNION COUNTRIES
2010 July - November
2011 January
Summary
The summary shall cover the world, the EU member states and the Lithuanian
economy as their main analysis of the indicators. The EU member states economic indicators,
statistical analysis are based on the Eurostat database.
The General domestic product (GDP) of the European Union member states in
the third quarter, compared with the previous quarter, grew by 0.5 percent. Over the years, the
final estimate of GDP is in line with the prior data and the analysts' forecasts - growth up to
2.2 per cent.
The European Commission (EC) predicts that the EU member states from the
Eastern European economies will grow steadily in the 2011 - 2012. It is believed that many
post communist countries will not significantly reduce their budgets deficits, so they will not
satisfy the requirements of the membership of the euro zone in the near future. According to
the EC's view, only in Sweden and in Germany the economy will grow faster than in Poland.
It is predicted that the EU's gross domestic product will grow by 1.8 per cent in 2010, 2011 1.7 per cent and 2012 - 2 per cent.
The European Commission argues that the economic recovery is stagnating
because of the low global demand and high unemployment rate, which the countries are still
failed to reduce. Despite the pessimism, the European Commission noted that the positive
factor is the fact that the economic recovery is generally fixed.
Three famous economists argue that the financial problems will not go away in
2011. Paul Krugman, Joseph Stiglitz and Nouriel Roubini warn the EU governments that their
measures are not effective.
Professor of London School of Economics and Nobel Prize laureate, P. Krugman
argues that the applicable measures adopted so far more harm than benefit as it was for the
model in 1937, giving the U.S. economy. That year president Theodore Roosevelt adopted the
following measures : spending cuts but it only “helped” the already rising economy to
collapse.
N. Roubini, the man who predicted the financial crisis in 2008 has not very good
opinion about the current situation. He argues that the euro area creates the greatest risk to the
global world growth. He believes that the anti-crisis measures in the periphery - the support
for the small countries - can only slow down the growth of the large European economies. The
economist predicts that much slower growth will be in the economies of Germany, France and
Italy in 2011.
The other Nobel laureate, J. Stiglitz has published his pessimistic forecasts the
same. The countries, which use only the budgetary financial injections, will give not only the
risk of growth retardation, but also a new wave of the economic crisis.
J Stiglitz considers that the developed countries should focus their attention on
the investment, reduction of military spending and reforming of the tax system if they want to
recover as quickly as possible their economic development.
One of the most serious problems the EU now is a debt crisis, which weakened
the euro and frightened the markets. The European Commission forecasts that the total debt of
the euro zone countries will rise to 86.5 percent of gross domestic product and far exceed the
allowable 60 percent GDP level this year.
The euro-zone countries in 2011 will have to refinance more debt than in all
previous years, therefore the investors expect that the new debt crisis in the region will be
worse. According to the forecast of the Italian bank UniCredit for 2011 the euro-zone
countries will have to refinance or cover 560 billions euro – that is 45 billions euro more than
in 2010 year and more than in all previous years of the existence of common currency.
In response to those risks, the European Union leaders agreed to create a
permanent mechanism to secure against the EU member bankruptcy which could threaten 16
countries in the euro zone.
The leaders of 27 EU countries agreed that till 2013 a provisional 750 billion
euro fund would come to the rescue from the bankruptcy .Then it will be replaced with the
European’s permanent mechanism of the financial stability. In addition, the euro zone, trying
to get rid of the EU bloc countries' debt problems, took a new step - the first time in history it
has spread on its bonds. The bonds were issued through AAA credit rating, which has the EU
mechanism of the financial stabilization. It was distributed 5 billions euro for 5 years' term
and borrowings at an annual interest rate - 2.59%.
According to the European Commission, these funds will be used in the Irish
financial rescue package, and their interest rates are 12 basis points higher than the market
average. According to the Commission, the demand for bonds was "very strong".
Also the European Union finance ministers agreed how to tighten the budget
rules with the purpose to prevent the public debt crisis and said that the offenders will be
sanctioned after the six months' period after the notice.
After this agreement when the country receives the notice of the improper
budget’s practices, it should change the situation during the six months' period before the
sanctions are taken. Under the current rules, the financial sanctions for the countries could be
applied only after the long process which could take several years. Until that time, the penalty
may only exacerbate the situation in the country. The Ministers agreed to adopt the new
sanctions against those countries in the euro zone, whose budget deficit exceeds 3 percent
gross domestic product and debt is more than 60 percent GDP.
In addition, it is proposed that the countries which violate the European Union’s
rules of deficit would have to pay up to 0.2 percent their gross domestic product, thus to be
ensuring that they reduce their deficits.
The European Union lawmakers approved a plan to create a supervisory body
for the formal banking sector, securities and insurance regulation. The European Parliament
has also given permission to create the European Council of systemic risk to monitor markets
and to send warnings to the EU countries about the economic and financial risks. The head of
the Council will be the head of the European Central Bank Jean-Claude Trichet. The new
supervisors will be operational in 2011.
The European Commission has proposed the reforms which aim is to find the
next EU budget revenue sources to introduce a common European value-added tax. But the
analysts think that the implementation of this idea will be very difficult.
This year approximately the three-quarters of the EU budget which is around
123 billions euro, are composed of the Member States' contributions, and the remainder is
collected through a special tax from the income of VAT and import duties. The Commission
proposes to introduce new ways to collect funds. Among other things it is proposed to pass the
part of the revenues from the tax on financial transactions, from the greenhouse gas emission
allowance in auctions or from the EU tax on the air transport to the EU budget. It is also
proposed to create a separate value-added tax, the EU energy tax or corporation tax. It is
necessary that the EU Member States and the European Parliament's proposals be approved.
According to the European Commission Europe must focus her attention for the industry to
remain a leader in the global economy. The industrial policy for globalization era, adopted by
the European Commission is the main problem of the Communication. The Communication,
which is a flagship initiative of the 'Europe 2020' strategy, seeks to promote growth and job
creation while maintaining and supporting a strong, diversified and competitive industry in
which well-paid jobs could be developed and lower-carbon technologies could be used.
In this era of globalization, the national sectors and national industry’s concepts
are becoming irrelevant. A common European policy response is required. Europe also needs
an approach that would encompass the entire value chain – from the infrastructure and raw
materials to service after the sales. To promote the development and expansion of the small
and medium-sized enterprises should be one of the EU's industrial policy objectives. In
addition, the transition to a sustainable economy must be seen as an opportunity to enhance
competitiveness. Only in terms of competitiveness and sustainability the European industrial
policy can cover all the important developments to ensure the prosperity and the coordination
of actions.
Most analysts agree that in 2011 Lithuania's gross domestic product will grow
faster, but notice that there are many challenges in the economic development. The Lithuanian
economic growth is more like 'L' but not 'U' shape script, and the country level before the
crisis should be achieved only after 5-6 years.
First of all, there is a high unemployment rate, which in the coming year will
decline too slowly, especially for the unskilled labor source. The public finances also remain
the sensitive point - the budget deficit doesn’t go away yet, and searching of the lacking funds
will result in the accumulation of debt in further.
Another important aspect is the state of the foreign economies. So far according
to the predictions of the analysts their growth outlook is more impressive than in 2010,
although it should remain positive. Many Western European countries during the crisis saved
their economies but bogged down in the excessive deficit. Now they must be reduced, and
hence the significant cost of cutting and fewer incentives for the economic development.
In order to maintain growth the growth pattern of economy will be changed by
promoting open international trade sectors. The historical experience shows that after the
economic downturn the industry is the main engine of the economic growth.
Till now the Lithuanian economy recovered because of the promotion of the
foreign market factors, but according to the economists we will be able to see more flash in
the domestic market this year. This can happen if the tone of the banks on lending will
continue to ease. It is true that the impressive development is not expected here, but in 2011
the movement to it should be (more) quicker. The number of bad loans has to be stabilized. It
seems likely that the number of profitable enterprises will increase and they can be more
proactive for their investment activities.