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The impacts of the economic crisis on
Central-Eastern Europe
PERC conference
Brussels 26 March 2010
Béla Galgóczi
ETUI
[email protected]
Main framework conditions – March 2010
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Clear signs of an end of the recession and a moderate
upturn in developed industrial economies (EU, US, Japan)
but it is volatile and still mostly due to on-off crisis
intervention measures
The labour market situation is further on tense,
unemployment is still growing, wages are under pressure
At the same time stock markets are soaring due to
abundance of liquidity (banks put their `easy money` into
the stock market instead of the real economy – a new
asset bubble is being blown)
This has however a positive side effect on CEE – more risk
taking means stabile markets, strengthening exchange
rates, low risk premia and growing raw material prices
Latvian risk premia (e.g CDS spreads) are lower than
those of Greece
Main framework conditions – March 2010
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The big fear is about debt levels accumulated through the
stimulus packages – what exit strategy?
● The Greek crisis has again put the debt issue in focus
● Even if no immediate impact on CEE, the risk is there
(especially if the GR crisis escalates)
● On the other hand CEE economies also perform better
now, but the social price is enormously high
● Even if Latvia and Hungary are seen as good examples for
quick fiscal consolidation – it is clear that the therapy was
harsher than necessary and the social price is huge
(especially in Latvia – see later)
● Where is Europe in this situation ? – the way it tackles the
GR crisis does not mean anything good for CEE!
● Many say now: GR has better chances with the IMF as
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it is softer than the EU
Main macroeconomic trends in Europe at light of available data
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GDP in 2009 ● a lost decade for many countries –
● Growth scenarios – back to trend growth or the `scar of the
crisis` remains for long term (important for job prospects!)
● GDP/employment/unemployment – huge differences
among countries – lessons for labour market policy
● The fiscal situation (alarming for many countries - with a
prospect of prolonged recession)
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Change in output, 2008Q1 to 2009Q2
%
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
-20
LT LV EE IE LU SI FI HU RO IT DE DK SE UK EU NL AT ES CZ SK BE PT FR MT GR CY PL
27
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Data source: Eurostat.
A lost decade? When Was Current GDP first achieved
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
DK
PT
IT
IE
ES
UK
EE
HU
SE
BE
FI
LT
LV
LU
DE
NL
SI
CZ
MT
SK
PL
Source: Euostat Quarterly National Accounts. Notes: This Graph shows when the current level of seasonally adjusted real GDP per
capita
6 was first achieved. Current Period taken as Q2 2009, except Poland (Q1 2009) and Italy (Q3 2008) Data unavailable for AT,
CY, FR, RO, GR and BG
Potential output and growth scenarios after the crisis
trend rate of output growth
output
actual path of output
output
output
growing output
losses
time
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time
time
GDP, employment and unemployment rates,
2009Q2 (change compared to 2008Q2)
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GDP percentage change
employment: percentage point changes
unemployment: percentage point changes
10
5
0
0
0,1
-5
-10
-15
-20
LT LV EE SI FI RO IE HU DK IT SE DE UK SK LU NL EU AT CZ ES BE PT FR MT CY GR PL
27
8
Source: Eurostat (2009) European Labour Force Survey and National Accounts. Age: 16-64. Note: incomplete data for BG.
employment (%)
Change in output and employment, 2008Q2-2009Q2
2
LU
1
DE NL
RO
0
SI
-1
HU
DK
FI
-3
-4
PL
MT
FR
BE
CZ
EU 27
SE UK
IT
-2
SK
AT
CY GR
PT
LT
-5
ES
-6
IE
EE
-7
-8
LV
-9
-20
-18
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Data source: Eurostat.
-16
-14
-12
-10
-8
-6
-4
-2
0
2
output (%)
Government budget deficit/surplus (% GDP)
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2008
2009
2010
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
EL IE RO UK MT LV ES HU PL FR LT EE PT IT SK EU CZ SI BE AT DE NL CY BG LU SE DK FI
27
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Data source: AMECO (2009 estimate, 2010 forecast).
Baltic states in focus
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The Baltic states were 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)
Crisis management focused on short term results and
not on a future perspective
No socially just distribution of the burdens
Severe conditions for fiscal tightening – to cut public
spending: Latvia 20% cut of public sector wages, 10%
cut of pensions, social welfare schemes)
Baltic states in focus
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At the same time, Latvia was anyway the second
poorest EU country and had the lowest level of social
spending
Its GDP is back on the level of 1990!
Unemployment over 20% - highest in EU
Wage cuts among highest in EU
Working poor among highest in EU
Labour market spending among lowest in EU (under
0.5% of GDP)
Latvia’s GDP in prices of 2000 in % to the level in 1990
140
125,3
119,6
120
113,9
101,5
99,6
100
91,8
89,6
84,5
78,8
80
74,1
68,8
62,6
64,4
1998
1999
58,4
60
49,7
50
49,6
51,3
1993
1994
1995
1996
54,6
40
20
0
1991
13
1992
1997
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Economic downturn and increase in unemployment rates. Harmonized
unemployment rates in selected EU countries, 2008-2009 (in %)
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Source: Own elaboration based on EUROSTAT data
Year on Year Percentage Real Change in Wages and
Salaries (Q2 2008 to Q2 2009)
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10
5
0
-5
-10
-15
LT MT EE LV UK NL IT FR DK PL CZ LU SK EU CY HU EA BE DE AT RO GR PT ES SI BG
27
16
Source: Eurostat Labour Cost Index and Harmonized Index of Consumer Prices. Note: Seasonally adjusted change in real wages
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salaries,2008Q2 to 2009Q2, except Netherlands, Luxembourg and Italy 2008Q1 to 2009Q1. (NACE rev2 sectors B-N). Data
unavailable for IE, SE and FI
In work at risk of poverty – single parents
45
40
35
30
25
20
15
10
5
0
LT PT LU LV BG EE ES RO CY CZ GR UK DE EU SI BE HU IT SE SK AT FI FR PL IE NL MT DK
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Data Source: Eurostat Survey of Income and Living Conditions. Notes: 2008 Figures except IE, IT, UK, and EU27
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Active and passive expenditure on labour market policies and
unemployment rates, 2007
Labour market services
active measures
passive measures
unemployment rate (right hand scale)
4,5
12
4
10
expenditure in % of GDP
3,5
3
8
2,5
6
2
1,5
4
1
2
0,5
0
0
EE RO LT CZ LV UK SI MT BG SK CY HU LU PL IT IE PT EU SE AT FR ES FI DE NL DK BE
27
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Source: Eurostat (2009) Labour Market Policy. Note: information for Greece is missing.
Where was Europe in this situation? – no visible strategy
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Europe was 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
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
receipee: cut spending at any price > this makes the
downturn even more severe
Even so, it is true that the IMF showed certain flexibility
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Conclusions
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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.
Conclusions
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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 /in SEE countries even more so/ are unprotected
● More fiscal room and effective labour market policy is
needed
● Decisive would be however the upturn in Western Europe
as this boosts CEE exports
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