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2011 - CEED Report: Central and Eastern Europe Development, development, opportunities and challenges

2011 - CEED Report: Central and Eastern Europe Development, development, opportunities and challenges

Executive Summary:

The CEE region is a great example of transition and integration success story. It should be rather called CEED, where “D” means Development. CEE-10 states have managed to grow at much faster rates than the core of the EU, increasing their GDP levels by 40-120% over the 1995-2008 period. Rapid economic growth has allowed these countries to substantially reduce per capita income gaps to the EU15 countries.

Table: average annual GDP growth rates in CEE-10, EU15 and the euro area
(EA),1995-2000 and 2000-2008, %.

Country 1995-2000 2000-2008
Bulgaria -0,4 5,8
Czech Republic 1,5 4,3
Estonia 6,7 6,4
Latvia 5,4 7,3
Lithuania 4,4 7,4
Hungary 3,6 3,1
Poland 5,4 4,2
Romania, a) -1,3 6,3
Slovenia 4,4 4,4
Slovakia 3,4 6,2
EU15 2,9 1,8
EA 2,7 1,7

CEED enterprises benefitted from integration with the EU market, demonstrating their flexibility, adaptability, productivity and ability to operate and expand in a very competitive environment. The pre-accession period together with EU enlargement forced these firms to undergo rapid, and costly restructuring and privatization processes. But growth of trade and investment flows between CEE countries and the EU, stimulated by unrestricted access to the Single Market, has been a powerful engine for CEED economic growth and development.

Between 2000-2009, CEE-10 was the one region in the world which received the largest amount of FDI in per capita terms second only to East Asia as far as absolute FDI inflows.

Although hit hard by global financial crisis, the CEED coped better than most of the Euro area member states. The below graph shows that the impact of the 2009 crisis on output levels in CEE-10 was substantial in nearly all countries. The falls of per capita GDP were larger (with the exception of Poland) than in the EU15. The cumulative fall of output between the third quarter of 2008 and the second quarter of 2009 was between 13% and 18% for the Baltic states, and between 5% and 10% for the rest (except for Poland), well exceeding the cumulative fall for the euro area (4,4%) and for the EU27 as a whole (4,5%). But the CEED region was able to draw on and benefit from hard transition and accession lessons learnt during earlier transition and integration period. Only 3 (LV, R, H) of 10 CEE countries needed to ask for IMF standby programs. Without the kind of EU support envisaged for the Euro area members, the CEED countries were able to address and rapidly resolved their macroeconomic problems relying on self-imposed discipline, instead of easy solutions and external assistance. For example, despite the calls from recognized international economists against, Latvia, Lithuania and Estonia avoided currencies devaluations and drastically cut public wages and expenditures. This resulted in replacement of their vast current account deficits with surpluses and immense decrease in inflation figures. Poland proved to be Europe’s best performing economy, labeled as a “green island” of economic growth. During the crisis, not a single case was noted among CEE-10 for changes to exchange rate policy. In general, the CEED governments cut public expenditures, wages, social transfers, and undertook painful austerity measures and policy reforms. The private sector displayed astonishing robustness despite the unfavorable macroeconomic environment and credit squeeze, becoming more resilient and competitive. As a result, at 3Q of 2010, 9 CEED countries were fulfilling the Maastricht public debt criterion, while from among euro area founders only 4 were doing so.

CEED is likely to remain by far the fastest growing part of the EU, with predicted growth rates almost twice as high on average as growth rates foreseen for the EU15 and the euro area.

Table: GDP growth rates in CEE-10, EU27, EU15 and euro area (EA)
2010-2012, %

Country 2010 2011f 2012 (forecast)
Bulgaria 0,2 2,6 2,8
Czech Republic 2,4 2,3 3,1
Estonia 3,1 4,4 3,5
Latvia -0,3 3,3 4,0
Lithuania 1,3 2,8 3,2
Hungary 1,2 2,8 3,2
Poland 3,8 3,9 4,2
Romania -1,3 1,5 3,8
Slovenia 1,2 1,9 2,6
Slovakia 4,0 3,0 3,9
EU27 1,8 1,7 2,0
EU15 1,8 1,6 1,9
EA 1,8 1,5 1,8

The engine for CEED growth is again in the hands of entrepreneurs. If firms adjusted to EU competition in transition phase they will most likely be able to adjust again to this new environment. This growth advantage will be key in maintaining the CEED’s position as the most attractive place to invest in Europe in the foreseeable future. Currently the CEE-10 countries combine the potential of emerging markets with the stability of developed economies – an absolutely unique feature. The danger is that while still being the leader of growth and convergence with the EU15, the CEE-10 could be affected by spillover of other countries’ troubles.

CEED is still undervalued, thus it must work on image. The clearest proof of this wrong perception applied to CEE-10, was the sudden change of market sentiment at the beginning of 2010, away from the CEE “problem” and towards the so-called PIGS (Portugal, Italy, Greece, Spain) countries and their possible risk of sovereign default. It appeared, that despite many problems in the region, the CEE-10 were able to manage and resolve their difficulties by themselves - once again through domestic policy commitment to market reforms and enterprise adjustment to externally changing conditions. Perception can be changed. The CEE-10 countries definitely deserve better off - a stronger and more widely recognized position on the global economic map. It is time for CEED – Central and Eastern Europe Development initiative!