Transcript No Slide Title

Central and eastern Europe:
Outlook and expectations for the next 18
months
Matthew Sherwood
Senior editor/economist
Deputy, Country Risk Services
June 2002
Topics

Economic forecasts

Business environment

EU accession
Central Europe is looking good





Central European growth weathers the
EU slowdown
Inflows of FDI fueling growth,
productivity and restructuring
Fiscal deficits remain a concern
Current-account deficits also a potential
problem
Inflation heads towards convergence
with the EU
Respectable GDP growth
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
% real change
2001
Cz Rep
Hungary
2002
Slovakia
2003
Poland
Source: EIU Country Data
EU
Budget deficits boom
% of GDP
0
-1
-2
-3
-4
-5
-6
2001
Cz Rep
Hungary
2002
Slovakia
2003
Poland
Source: EIU Country Data
Inflation: towards convergence
av % change
10
Cz Rep
Hun
Pol
Slo
EU-3
Ref
8
6
4
2
0
2001
2002
2003
2004
2005
2006
Source: EIU Country Data
Twin deficit problems return?
% of GDP
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
2001
Cz Rep
Hungary
2002
Slovakia
2003
Poland
Source: EIU Country Data
Inflows of FDI remain strong
8
US$, bn
7
6
5
4
3
2
1
2001
Cz Rep
2002
Poland
Hungary
2003
Slovakia
Source: EIU Country Data
Per capita FDI paints another picture
800
US$
700
600
500
400
300
200
100
0
2001
Cz Rep
2002
Poland
Hungary
2003
Slovakia
Source: EIU Country Data
Eastern Europe is left behind?





Growth is no longer a problem
Budgets actually look good
Inflation has yet to be tamed
Current-account balances: “left-outs”
versus the former Soviet Union
Where’s the foreign investment?
Strong growth in eastern Europe
10
GDP, % real change
8
6
4
2
0
2001
Bulgaria
2002
Romania
Russia
2003
Ukraine
Source: EIU Country Data
Budget balances: a mixed performance
% of GDP
3
2
1
0
-1
-2
-3
-4
2001
Bulgaria
2002
Romania
Russia
2003
Ukraine
Source: EIU Country Data
Inflation: Much to be done
CPI, av % change
36
32
28
24
20
16
12
8
4
0
Bul
Rom
Ukr
Rus
2001 2002 2003 2004 2005 2006
Source: EIU Country Data
Current-account balances
% of GDP
12
10
8
6
4
2
0
-2
-4
-6
-8
2001
Bulgaria
2002
Romania
Russia
2003
Ukraine
Source: EIU Country Data
Per capita FDI inflows remain paltry
100
US$
75
50
25
0
2001
Bulgaria
2002
Romania
2003
Russia
Ukraine
Source: EIU Country Data
EU enlargement: What could go wrong?
 Enlargement
in 2004: The dates
 Developments to watch
 negotiations run late
 Ireland rejects the Nice treaty
 public opinion turns against
enlargement
 Risk scenarios
 Implications for euro-zone accession
The Commission’s Road Map
Start neg.
Helsinki 6
End of negotiations
Ratification &
referenda
Start neg.
Luxembourg 6
1998
Accession
1999
2000
2001
2002
2003
2004
EP election
2005
Danger points
Ireland rejects
Nice treaty
again
Start neg.
Helsinki 6
Ireland rejects
Nice treaty
Start neg.
Luxembourg 6
Negotiations
Accession?
run late
Accession
End of
negotiations
EP election
Ratification &
referenda
Accession treaty opposed
EU accession rejected
1998
1999
2000
2001
2002
2003
2004
2005
Negotiations: The status quo
Agreements
on
most policy
“chapters”, including
migration,
environment,
competition, tax…
Money issues left to
the end: farm aid,
regional subsidies
Implementation &
enforcement lagging
Policy chapters closed
30
20
10
0
CZ ES SL HU Pl SK LT BG RO
2000
2002
What is behind the budget row?
AC-10 as % of EU-15
100
75
50
Farm land
Farmers
GDP per
head PPP
GDP PPP
GDP
0
Population
25
What’s behind the budget row? -2CAP:
Structural funds:


Farm subsidies to be
phased in over ten years
 Starting at just 25% of EU
Rural development
spending only 10% of
CAP budget
 No final EU position until
after German election
New members could be net
contributors to EU
budget?
Regional aid phased in
over three years
 All AC-10 eligible for
regional aid (per capita
GDP < 75% EU av.)
 Aid flows capped at 4%
of GDP
Big budget row
postponed until 2006?
Nice treaty





EU summit in Nice in 2000 agrees on
institutional changes necessary for
enlargement:
adjustment of voting weights in the Council of
Ministers
reducing the number of portfolios (and
Commissioners) in the Brussels bureaucracy
Ireland rejects Nice treaty in June 2001
May do so again in second referendum in
October/November 2002
What happens if Ireland says no?
Scenario 1
Institutional provisions pasted
into the Accession treaty
Accession treaty ratified
But:
Political setback at a time
when enl. talks are in their “hot”
phase
Loss of political momentum,
Euroscepticism
Accession likely to be
delayed
Scenario 2
Institutional questions
handed over to the
Convention, which prepares
the next Intergovernmental
Conference (IGC)
ICG concludes in 2004?
New treaty ratified by 2005?
Enlargement
2006 or later?
Public opinion: The EU-15




Accession treaty needs to be ratified by 15 EU
parliaments (and EP)
A majority is against EU enlargement in
France, Austria, Germany...
Fears of migration despite 5-7 year transition
period
Rise of the far right could further complicate
accession talks or draw out ratification process
Public opinion: EU-15
Is EU enlargement beneficial?
100%
50%
Don't know
Not beneficial
Beneficial
0%
EU15
F
A
D
UK
E
Public opinion: The candidates





Accession treaty needs to be ratified by
parliaments
Most (all?) EU candidates will hold referenda
on EU accession after the end of the accession
negotiations
Public opinion is still in favour of EU accession
in most countries
Rising Euroscepticism
Resentment against EU attempts to get
enlargement “on the cheap”
Public opinion: The candidates
100%
Would not vote
Don’t know
Against
For
50%
0%
AC
13
PL
CZ
HU
LV
ES
RO
Risk assessment






Negotiations run late (high risk)
Ireland rejects the Nice treaty (high risk)
Public opinion turns against enlargement
(moderate risk)
High risk that EU enlargement will be delayed
until 2005
Moderate (but growing) risk of longer delays
Euro-zone membership in 2006-2007 unlikely