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Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Impacts of the global crisis and future growth challenges Strategie Evropa 2020 jako reakce na krizi: cesty k posílení ekonomického rustu a konkurenceschopnosti Peter Havlik The Vienna Institute for International Economic Studies (wiiw) September 2010 2 Growth model, global crisis and the Strategy Europe 2020 Key points: Growth model: liberalization and integration Global crisis: transmitted via the growth model Strategy Europe 2020: a revival of Lisbon ? wiiw 3 Key features of the (old) growth model: significant internal and external liberalization (trade flows, capital transactions, financial market integration) targeted at integration with the EU area benefits: capital inflows (FDI), trade integration, ‘technology’ transfer; institutional convergence the model worked - ‘convergence process’ – but structural (and sometimes unsustainable) imbalances emerged wiiw 4 Trade balance of goods and services, in % of GDP 6 0 -6 -12 -18 -24 6 0 -6 -12 -18 -24 6 0 -6 -12 -18 -24 NMS-5 (CZ) Baltics SEE 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001). Source: wiiw Annual Database incorporating national statistics, Eurostat. wiiw 6 Income catching-up: per capita GDP at PPP Projection assuming a 50% growth differential with respect to EU-27 after 2013 (compared to the average growth differential in the period 2000-2008) EU-27 average = 100 BG CZ HU PL RO SK 100 90 80 70 60 50 40 30 20 10 0 1995 2000 2005 2008 2009 2010 2015 2020 wiiw 7 Three transmission channels of the crisis: I. Collapse of demand for imports from the region - => collapse of exports - => collapse of industrial production - => collapse of oil and metals prices (RU, UA, KZ) II. More difficult credit financing for households, companies and government after September 2008 (Lehman Brothers exit) III. Hardly any counter-cyclical economic policy measures of the state (except Russia, Kazakhstan and Poland) wiiw 8 Collapse of exports after Sept. 2008 in EUR, January 2007 = 100 Quelle: wiiw-Monatsdatenbank. May-10 Jan-10 Sep-09 May-09 Jan-09 Sep-08 May-08 Jan-08 Sep-07 SK May-07 Jan-07 Sep-06 May-06 Jan-06 Sep-05 HU May-05 Jan-05 Sep-04 May-04 170 160 150 140 130 120 110 100 90 80 70 60 50 Jan-04 CZ wiiw 11 Budget deficit and public debt, 2008 in % of GDP (Maastricht criteria) NMS OMS EU-27 High public debt Unsustainable Public debt (< 60%) 140 -15 120 100 IT GR 80 UK -12 -9 IE HU PT 60 FR -6 ES LV RO 40 20 DE AT EU-27 -3 NL 0 SE SK 3 6 DK CZ SI BG EE 0 High fiscal deficit Source: wiiw Database based on Eurostat. Fiscal deficit (< 3%) Maastricht compliant wiiw 9 12 Budget deficit and public debt, 2010 in % of GDP (Maastricht criteria) NMS OMS EU-27 High public debt Unsustainable 140 Public debt (< 60%) GR -15 120 IT IE PT UK FR -12 80 HU EU-27 AT ES 100 DE NL -9 LV -6 PL SK SI CZ LT DK RO 60 -3 0 3 6 SE 40 20 BG EE 0 High fiscal deficit Source: European Commission forecast. Fiscal deficit (< 3%) Maastricht compliant wiiw 9 14 Strategy Europe 2020 Raising the employment rate of the population aged 20-64 from the current 69% to 75% Raising the investment in R&D to 3% of the EU's GDP Meeting the EU's '20/20/20' objectives on greenhouse gas emission reduction and renewable energies Reducing the share of early school leavers from the current 15% to under 10% and making sure that at least 40% of youngsters have a degree or diploma Reducing the number of Europeans living below the poverty line by 25%, lifting 20 million out of poverty from the current 80 million. wiiw 15 Employment by skill groups average changes 2000-2007, 2008 and 2009, in % Total High-skill Medium-skill Low-skill 10 5 0 -5 -10 EU-27 CZ HU PL SK RO Source: Eurostat, wiiw calculations. 09 08 00-07 09 08 00-07 09 08 00-07 09 08 00-07 09 08 00-07 09 08 00-07 -15 wiiw 16 ULC growth and contributions of main components, average annual changes in %, 2005-2010 ‘Fixers’ Average gross wages BG GDP EE 100% Employed persons LV LT Exchange rate SK SI ULC (rhs) AT 20 16.2 80% 15 15.0 60% 40% 9.0 11.9 12.8 10.9 5 5.6 4.5 0% -5.0 1.8 0.0 0 2.5 0.2 -0.2 -3.6 -40% -60% 10.5 9.8 2.2 20% -20% 10 -10 -8.1 -9.9 -15 -80% -100% -5 -15.3 -20 av. 2009 2010 av. 2009 2010 av. 2009 2010 av. 2009 2010 av. 2009 2010 av. 2009 2010 av. 2009 2010 0505050505050508 08 08 08 08 08 08 Source: wiiw Annual database incorporating national statistics and Eurostat. wiiw 17 ULC growth and contributions of main components average annual changes in %, 2005-2010 ‘Floaters’ Average gross wages CZ GDP HU Employed persons PL Exchange rate RO RU ULC (rhs) UA 100% 25 80% 60% 11.5 40% 20% -40% 17.2 5.6 9.5 0.5 4.2 0% -20% 20.6 19.3 18.6 15 10 5 6.6 4.0 -1.1 -3.0 20 22.2 0 -4.6 -5 -6.3 -10 -15.5 -60% -15 -15.1 -80% -20 -100% -25 av. 2009 2010 av. 2009 2010 av. 2009 2010 av. 2009 2010 av. 2009 2010 av. 2009 2010 05-08 05-08 05-08 05-08 05-08 05-08 Source: wiiw Annual database incorporating national statistics and Eurostat. wiiw 21 Exchange rates Flexible exchange rates have supported sustainable current account deficits ‘Floater’ countries had a less costly adjustment to the crisis (lower employment losses) Nominal depreciations improve competitiveness and support growth once external demand recovers Fixed exchange rates tend to mandate procyclical fiscal policies during the crisis and in the medium run EMU membership may not protect against real exchange rate misalignments Flexibility helps – especially in times of crisis wiiw 22 Constraints following the crisis: External factors: higher risk assessment of the region; more difficult external (and internal) financing; reduced growth expectations in the most important export markets; tougher to join the eurozone (new OCA debate) wiiw 23 Constraints following the crisis: Internal factors: ‘Deleveraging’ of private sector, increased propensity to save; more limited room to manoeuvre for fiscal policy; weaker and more cautious banking sector; very differentiated processes of real exchange rate adjustments wiiw 24 Some tentative conclusions EU and national policies should be reformed in order to improve “economic governance” in order to benefit from trade and financial integration regulation is needed to deal with external and domestic imbalances measures to improve competitiveness needed (Strategy Europe 2020) depending on the types and severity of imbalances, the speed to full integration should be calibrated (“flexibility” helps) depending upon country-specific circumstances, the ‘integration model of growth’ must be adjusted but not abandoned wiiw 27 Selected references: ‘Will Exports Prevail over Austerity?’ wiiw Current Analysis and Forecasts, No. 6, July 2010, Vienna ‘Whither Growth in Central and Eastern Europe? Policy lessons for an integrated Europe’ Policy Report written by the Bruegel-wiiw Expert Group, Vienna and Brussels, June 2010 Atoyan, R., (2010), ‘Beyond the Crisis: Revisiting Emerging Europe’s Growth Model’, IMF Working Paper 10/92 Havlik, P., (2010), ‘Unit Labour Costs, Exchange Rates and Responses to the Crisis’, wiiw Monthly Report No. 7/10, July Haddad, M., Harrison, A., Hausman, C., (2010), ‘Decomposing the Great Trade Collapse: Products, Prices, and Quantities in the 2008-2009 Crisis’. NBER Working Paper No. 16253, August IMF-ILO, (2010), ‘The Challenges of Growth, Employment and Social Cohesion’. Discussion document prepared for joint IMF-ILO conference, September wiiw