Transcript The Global Financial Crisis and Eastern Europe

The Global Crisis - Role of Regional
Integration and EU Accession
Milica Uvalic
University of Perugia
Western Balkans in 2020 – Overcoming the
Economic Crisis and Developing Competitive
Economies, Sarajevo, 24-25 February 2010
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1. Effects of the crisis
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The WB countries also severely hit by the global
economic crisis, though with a delay (only last
quarter of 2008), by 2 external shocks:
 Reduced inflows of foreign capital (FDI,
remittances, foreign loans)
 Reduced demand for exports
In 2009, strongly negative growth in all countries
except Albania
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3
Effects of the crisis
Recovery on its way (2010), partly as a
consequence of improving prospects in EU,
but growth sluggish in 2010 (max. 2%), in
all cases 50-90% lower than in 2008
Still, WB are not the most severely hit
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Real GDP growth 2009-10 (IMF, EBRD)
European Union
Euro area
2009
-4.2
-4.2
2010
0.5
0.3
New EU Member States
Estonia
Hungary
Latvia
Lithuania
Slovenia
Bulgaria
Romania
-4.3
-14.7
-6.0
-17.9
-15.2
-7.5
-4.8
-7.0
0.7
-1.8
2.0
-2.0
-0.5
1.9
0
1.3
In 7 new EU MS output fall
greater than in most WB
In 4 new EU MS output growth
still not positive (contrary to WB)
4.3
-4.4
-5.9
-1.2
-4.3
-3.1
2.0
0.6
0.6
2.0
0.4
2.4
Western Balkans
Albania
Bosnia & H.
Croatia
Macedonia
Montenegro
Serbia
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Reasons for milder effects in WB?
Not because WB have lower current account
deficits and thus are less dependent on inflows of
foreign capital
 Most WB are less integrated with the EU than
the new EU member states
(1) Trade: WB are still quite closed economies, less
open than most new EU member states, and
many old EU member states

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Balkan exports of goods and services
2008 (% of GDP)
60
50
40
30
20
Services
Goods
10
0
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(2)FDI in WB still relatively low
40000
35000
Million US $
30000
25000
20000
15000
10000
5000
0
2001
2002
CEE & Baltics
2003
2004
2005
CIS
Western Balkans
2006
2007
2008
Bulgaria & Romania
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(3)Financial markets

Similarities of WB with new EU MS
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Foreign banks in WB: 78-98% of banking assets
Lending policies of easy credit credit boom, many
loans in foreign currency (60% in both Croatia and
Serbia)
Credit crunchincreasing credit defaults in 2009
Main difference: financial markets in WB are less
developed, less sophisticated financial
instruments, though higher degree of euroization
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Credit boom
Domestic credit to private sector
(% of GDP)
100
80
Albania
60
Serbia
Macedonia
40
Bosnia
20
Croatia
Montenegro
0
2005
2006
2007
2008
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(4)Facilitating factors

International

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Loans from the IMF (Serbia, Bosnia...)
IMF-sponsored “Vienna initiative”: agreement with
foreign banks to prevent capital withdrawals
Support of banks by EBRD (Unicredit), or by
governments through nationalizations (Hypo-AlpeAdria)
Some EU funds (IPA, EIB)
Domestic buffers


Remittances declined less than expected
Savings under mattresses; Serbia €3 billion (9% of GDP)
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2. Role of regional and EU integration
Lower integration of WB with EU has also meant a lower
exposure to the effects of the global crisis
 After 2001, there has been a gradual re-integration of the WB
region through increasing trade (CEFTA) and other economic
links
Increasing regional integration among WB countries has
made the effects of the global crisis less severe
 But the global crisis  structural weaknesses and fragility of
WB economies, due to the model of credit-driven growth and
resulting dependence on capital inflows from abroad
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Role of regional and EU integration

The global crisis has revealed more general flaws of the
transition strategy pursued in WB, many problems …
 Consumption much higher than production, financed by
foreign savings & investment
 Extremely high unemployment
 Slow growth of new private sector, limited restructuring
 Inadequate structural changes, favouring primarily fast
expansion of services, closely related to
 Structure of FDI (banking, telecommunications, real estate...)
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Role of regional and EU integration
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Key structural deficiency: weak export performance, insufficient
tradable goods at competitive terms, not facilitated by
overvalued currencies
But the main problem in WB  insufficiently restructured real
sector
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Extreme de-industrialisation (1990s)
FDI has gone into few industrial sectors
Insufficient recovery (Serbia: industrial prod. at 50% of 1989 level)
Over the next few years, despite remaining privatisation
opportunities, WB cannot rely much on FDI (drop by 50%), need
to reconsider the growth model
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Role of regional and EU integration
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Since most WB countries are not likely to enter the EU very
soon, regional integration can and should play an important role
in the medium term
How can regional cooperation enhance competitiveness and
strengthen export performance of WB?
WB cannot be competitive in all sectors
They need to define longer-term priorities, based on national
programmes of regional specialization  a regional division of
labour
Regional integration can strengthen WB economies, preparing
them for entry into the EU
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Role of regional and EU integration
Regional industrial policy – not to support national
champions, but horizontal measures for all
enterprises…Measures to encourage innovation, R&D, protect
quality standards, facilitate enterprise restructuring,
strengthen and diversify the industrial base
In line with the current EU approach to industrial policy, as
defined in the Maastricht Treaty and the Lisbon Strategy
“policy to enhance enterprise competitiveness”
 Also in WB: industrial policies to promote structural change,
facilitate the transformation of industries and the creation of
trans-national networks (S&T, education, specific
sectors)Lisbon Strategy for the Balkans …
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