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Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies 3rd Craft, Trade and SME Summit Luxembourg, 23-24th April 2004 Accession Countries on the Eve of EU Enlargement Peter Havlik (wiiw) Current economic situation and outlook for the region Income and productivity catching-up in the ACs Challenges of EU accession for the new member states www.wiiw.ac.at Gross Domestic Product (GDP) annual changes in % against previous year 2002 2003 2004 2005 Forecast 3.0 3.5 3.5 3.9 4 4 4.5 5 3.4 3.5 3.7 3.9 Czech Republic Hungary Poland Slovak Republic Slovenia CEEC-5 2.0 3.5 1.4 4.4 2.9 2.2 2.9 2.9 3.7 4.0 2.2 3.4 Estonia Latvia Lithuania CEEC-8 6.0 6.1 6.8 2.5 4.8 7.4 8.9 3.7 5.4 6.2 6.9 4.0 5.9 6.2 6.6 4.2 Bulgaria Romania CEEC-10 4.8 4.9 3.0 4.5 4.9 3.9 4.5 4.5 4.2 4 4.5 4.1 Croatia Macedonia Serbia and Montenegro 5.2 0.3 4.0 4.3 2.8 1.0 3.2 4 2 3.5 4 3 Russia Ukraine 4.7 5.2 7.3 9.3 5.0 7 4.6 6.5 EU(15) Austria 1.1 1.4 0.8 0.8 2.0 1.6 2.4 2.2 ‹#› Real per capita GDP in ACs EU(25) average = 100 CZ HU PL SK SI EE LV LT 100 90 80 70 60 50 40 30 20 10 0 1995 2000 2003 2004 2005 2010 Note: Projection assuming a 2 percentage points growth differential with respect to the EU(15) after 2003. 2015 ‹#› Productivity in ACs and EU(15) Index 1995=100 GDP(ACs) Employment(ACs) Productivity(ACs) Productivity EU(15) 135 Productivity growth in EU(25) will accelerate: +23 120 105 90 1990 1992 1994 1996 1998 2000 2002 ‹#› Productivity in ACs and EU(15) GDP per employed persons, EU(15) = 100, year 2003 AC(8) USA EU(25) 125 121 100 93 75 Productivity level in EU(25) will drop by 7% after 50 accession compared to EU(15) 53 25 0 at PPPs ‹#› Consequences of EU accession for ACs: GDP growth No immediate direct growth effects (year 2004) expected Facit: The recent catching-up processes will continue Genuine growth forecasts now hardly possible European economy slowly recovers from stagnation Higher GDP growth expected in the medium and long run highly integrated ACs profit from the EU recovery as well Accelerated GDP growth after 2005 possible ‹#› Inflation (consumer prices) annual changes in % against previous year 2002 2003 2004 2005 Forecast 3.5 2 6.9 5 2 3 8 5 4 3.5 Czech Republic Hungary Poland Slovak Republic Slovenia 1.8 5.3 1.9 3.3 7.5 0.1 4.7 0.8 8.5 5.6 Estonia Latvia Lithuania 3.6 1.9 0.3 1.4 2.9 -1.2 2.8 4 1 2.9 3.5 2.2 Bulgaria Romania 5.8 22.5 2.4 15.3 5 11 3 8 Croatia Macedonia Serbia and Montenegro Russia Ukraine 2.2 1.4 16.5 16.0 0.8 1.5 2.4 9.4 13.6 5.2 2 3 8 10 7 1.5 2 8 8 5 ‹#› Consequences of EU accession for ACs: Inflation Price levels temporarily increase (except Slovenia) Facit: Higher interest rates as a reaction to inflationary pressures may pose a break on the future GDP growth As a consequence of the harmonisation of Taxes and Tariffs with the EU The requirement to meet Maastricht criteria will exert a downward pressure on inflation Adjustments to EU price levels in the Single Market expected in the medium and long run ‹#› Government deficit (= „-“) in % of GDP 2000 2001 2002 2003 2004 2005 2 0 -2 -4 -6 -8 -10 Maastricht (3% des BIP) -12 -14 CZ EE HU LV LT PL SK SI ‹#› Government debt in % of GDP 2000 2001 2002 2003 2004 2005 60 Maastricht (60% des BIP) 50 40 30 20 10 0 CZ EE HU LV LT PL SK SI ‹#› Consequences of EU accession for ACs: State budgets Revenues from trade tariffs drop Costs due to the implementation of ‚acquis‘-regulations increase Contributions to EU budget from 1 May Facit: Co-financing of EU projects and Expected anti-inflationary agricultural subsidies measures and government Revenues from project-related transfers deficit reduction programs may uncertain (mainly 2004) well result in lower GDP growth The already high government deficits in the short- and medium run may well grow Consolidation requirements may result in more restrictive fiscal politicies ‹#› FDI stocks in ACs, Ukraine and Russia, 2003 per capita (EUR) in % of GDP EU FDI share 4000 90 3500 80 3000 70 72.3 60 2500 2000 50 55.8 40 1500 38.8 30 31.8 1000 26.2 500 30.2 25.2 16.5 20 20.1 19 14 13.5 10 0 0 CZ HU EE SI LV PO SK LT BU RO UKR RUS ‹#› Consequences of EU accession for ACs: Foreign trade Facit: Deterioration of trade and current account balances possible Exports and Imports grow as last trade barriers disappear (especially in agriculture and services trade) Growing trade also among ACs themselves Extra-EU Imports increase due to market growth effects Market services in the ‚old‘ EU remain competitive; outsourcing to ACs only in selected areas ‹#› Nominal exchange rates, Jan. 2000=100 (national currency vis-à-vis EUR) CZ HU PL SK SI 120 115 110 105 100 95 90 85 80 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 ‹#› Consequences of EU accession for ACs: Participation in ERM II and EMU accession After initial enthusiasm most ACs are nowadays rather cautious Facit: Euro accession 2007 at the earliest (EE, LT, LV, SI) Resp. only after 2008 (CZ, HU, PO, SK) Only Estonia, Latvia, Lithuania and Slovenia intend to join ERM II immediately after EU accession (2 years ER stability, +/-15% fluctuations permitted) Poland, Hungary, Slovakia and the Czech Republic will and can join EMU only some time afterwards ‹#› Unemplyoment rates (LFS) annual averages in % 2002 2003 Czech Republic Hungary Poland Slovak Republic Slovenia CEEC-5 7.3 5.8 19.9 18.5 6.4 15.3 7.8 5.9 19.5 17.4 6.7 15.0 2004 2005 Prognose 8.2 8.2 6 6 20 19 16 15 6.3 6 15.2 14.6 Estonia Latvia Lithuania CEEC-8 10.3 12.0 13.8 15.0 10.0 10.8 12.7 14.6 10 10 12 14.7 10 10 11 14.2 Bulgaria Romania CEEC-10 17.8 8.4 13.8 14.5 7.0 13.0 14 8 13.4 13 7 12.6 Croatia Macedonia Serbia and Montenegro 14.8 31.9 13.8 14 36.7 14 14 36 15 13.5 35 15 Russia Ukraine 8.0 10.1 8.5 9.5 8 9 9 8.5 ‹#› Unemployment rates by region (%), 2002 0.00 to 5.00 5.00 to 10.00 10.00 to 15.00 15.00 to 30.00 No data ‹#› Consequences of EU accession for ACs: Labour market and migration Lasting high unemployment in most ACs (‚jobless growth‘) Facit: Labour market will remain the major challenge for the EU in future as well East-west migration waves are not expected Nevertheless, additional migration flows hardly expected due to existing restrictions and low labour mobility in the ACs In the medium- and long run, the ACs will face labour market shortages due to low birth rates and aging populations ‹#› Summary conclusions > GDP growth: no immediate direct effects of EU accession, more growth in the medium and long run (assuming ‚good‘ policies), yet exact forecasts are hardly possible > Inflation: temporary price increases, higher interest rates likely > State budget: higher deficits, restrictive fiscal and monetary policies could pose a break on future GDP growth > Foreign trade: exports and imports will grow; trade and current account balances may deteriorate > FDI flows: no boom; privatisation completed, few additional big projects, only greenfield and SME investments will expand > EMU (Euro) accession: 2007 at the earliest (EE, LT, LV, SI) resp. only after 2008 (CZ, HU, PO, SK)