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THE ROLE OF THE EU
IN SUPPORTING EMERGING ECONOMIES
IN COPING WITH THE CRISIS.
European Commission
Directorate General for Economic and Financial Affairs
(DG ECFIN)
Conference of the Armenian
International Policy Research Group
7 - 8 of July 2009, Yerevan, Armenia
1.
The crisis has spread worldwide through economic and
financial linkages. It is truly global in character.
2.
However, the effect differs depending on structural
characteristics and policy responses.
2
Global economy in recession,
led by advanced economies….
2
(q-o -q % c ha nge , s a )
1
0
-1
-2
-3
-4
-5
07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2
US
Japan
3
..including the EU.
5
Annual volume change in GDP, EU27, %
forecast
4
3
2
1
0
-1
-2
-3
-4
-5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Eurostat and Commission services.
4
1.
The crisis is having a profound impact on the economies of
EU neighbour countries.
2.
The direct impact on Mediterranean neighbours appears to
have been more muted, reflecting their more closed
structure, relatively conservative financing pattern and also
due to the rebalancing of Gulf region investment that helped
cushion the shock.
5
Effects of the Crisis: GDP.
Mediterranean Region - GDP growth
GDP growth %
8.8
8.0
7.2
6.4
5.6
4.8
4.0
3.2
2.4
1.6
0.8
0.0
-0.8
-1.6
-2.4
-3.2
-4.0
-4.8
2005
2006
Algeria
Israel
Lebanon
Morocco
Syria
2007
2008 (prel.)
2009 (proj.)
Egypt
Jordan
Libya
OPT
MED Region (GDP at PPP)
Source: IMF, EIU, EC Staff calculations
6
1.
The eastern neighbours have felt the impact of the crisis
more directly than Mediterranean neighbours.
2.
The same transmission channels of the global downturn
brought to a halt a full decade of strong growth in the east
neighbours, which was the second fastest growing area on
the planet. The region will be in recession in 2009.
7
Effects of the Crisis:
East neighbour countries GDP.
40
35
30
25
20
15
10
5
0
-5
-10
-15
Armenia
Azerbaijan
Belarus
Georgia
Moldova
Ukraine
8
GDP Weight Average
M
1
M 20
2
M 2006
3
M 2006
4
M 2006
5
M 2006
6
M 2006
7
M 2006
8
M 2006
M 9 2 06
1
M 0 2006
1
M 1 2006
12 00
M 20 6
1
M 2006
2
M 2007
3
M 2007
4
M 2007
5
M 2007
6
M 2007
7
M 2007
8
M 2007
M 9 2 07
1
M 0 2007
1
M 1 2007
12 00
M 20 7
1
M 2007
2
M 2008
3
M 2008
4
M 2008
5
M 2008
6
M 2008
7
M 2008
8
M 2008
M 9 2 08
1
M 0 2008
1
M 1 2008
12 0
M 2008
1
M 2008
2
M 2009
3
M 2009
4 09
20
09
East neighbour countries:
Exchange Rates
160
150
140
130
120
110
100
90
80
70
60
9
Armenia
Azerbaijan
Belarus
Georgia
Moldova
Ukraine
Average
M
1
M 20
2
M 2006
3
M 2006
4
M 2006
5
M 2006
6
M 2006
7
M 2006
8
M 2006
M 9 2 06
1
M 0 2006
1
M 1 2006
12 0
M 2006
1
M 2006
2
M 2007
3
M 2007
4
M 2007
5
M 2007
6
M 2007
7
M 2007
8
M 2007
M 9 2 07
1
M 0 2007
1
M 1 2007
12 0
M 2007
1
M 2007
2
M 2008
3
M 2008
4
M 2008
5
M 2008
6
M 2008
7
M 2008
8
M 2008
M 9 2 08
1
M 0 2008
1
M 1 2008
12 0
M 2008
1
M 2008
2
M 2009
3
M 2009
4 09
20
09
East neighbour countries: Reserves
700
600
500
400
300
200
100
0
Armenia
Azerbaijan
Belarus
Georgia
Moldova
Ukraine
Total
10
East neighbour countries : CAB
40
30
Azerbaijan
20
10
0
09
20
08
20
07
20
06
20
05
20
-10
-20
-30
Armenia
Georgia
GDP Weighted Average
Azerbaijan
Moldova
Belarus
Ukraine
11
100
East neighbour countries :
Debt and 2Deficit
90
0
80
20
-2
70
60
05
20
06
20
07
20
20
08
-4
50
-6
40
30
-8
20
10
0
2005
2006
Armenia
Georgia
GDP Weighted Average
-10
2007
Azerbaijan
Moldova
2008
Belarus
Ukraine
2009 -12
Armenia
Georgia
GDP Weighted Average
Azerbaijan
Moldova
Belarus
Ukraine
12
09
East neighbour countries :
Banks’ Exposure
Claims of BIS reporting banks on the EU eastern neighbours
in % of country's GDP
Ukraine
40
Moldova
European banks' foreign claims on
the Eastern Partnership in 2008
Total EP = EUR 38 bn
30
Azerbaijan
0.9%
5.3%
1.5%
7.5%
20
Belarus
1.0%
Armenia
Azerbaijan
Georgia
10
Moldova
Armenia
0
2004
Belarus
Georgia
2005
2006
2007
2008
Total Eastern
Partnership
83.8%
Ukraine
13
Policy responses to the global crisis:
East neighbour countries
EaP - Overview of recent fiscal, monetary and financial support
Armenia* Azerbaijan Belarus*
Fiscal support
Fiscal stimulus (% of GDP) ***
Nature of stimulus
* Infrastructure
* Export
* Tax cuts
* Non-bank bail-outs
* Other
Fiscal stimulus (% of GDP) †
Monetary support
Monetary easing (basis points, decrease from peak)
1200
Quantitative easing
Financial support
Deposit guarantees
√
Liquidity provision
√
Loan guarantees
Capital injection
√
√
Asset purchase
Nationalisation
25%
Depreciation of pegged currencies
against
USD
Drop in reserve requirements
√
Legend: * Country under IMF programme, *** Announced, † Effective, √ yes
Source: Central banks of the ENP-countries, EC.
Georgia* Moldova* Ukraine*
3.0
1.0
3.0
550
√
√
17%
against
USD
√
√
√
√
√
37%
against
USD
14
EU Policy responses to the crisis
•
•
•
Rather similar to the ones taken by East neighbour countries.
Underlines the commonality of the shock (forecast –4% GDP fall
in 2009 for the EU/euro area) and its diagnoses.
Liquidity provision, monetary easing in a concerted, joint policy
action. Liquidity provision by the ECB has been extraordinary in
size and scope (more than 15% of GDP); implementation of nonstandard measures. Provision of USD through swaps agreements to
non-members of the Euro-area.
Government action to strengthen the balance sheet of banks, in
order to stabilize the banking system. Governments provided
massive support to banks: euro area banks have received € 113 bn
of capital injections, and € 300 bn of government guarantees. Also
asset relief schemes; removal of impaired assets. Member states
measures effected for the banking sector amounted to 12% of GDP
in Euro area.
15
EU Policy responses to the crisis
•
•
•
Strengthening of the financial facility to support MSs in
difficulties. Economic support in the balance of payments has been
decided for Hungary (€ 6.5 bn, 1.1% of GDP), for Romania € 5 bn,
4% of GDP) and for Latvia (€ 3.1 bn, 14% of GDP)
EU leaders agreed on the principles for an unprecedented
concerted action in the EU: the European Economic Recovery Plan
(EERP) which consists of macroeconomic policies for the
stimulation of aggregate demand.
Fiscal was stimulus in a coordinated way by the EU. It amounts to
3% of GDP including automatic stabilizers. No ‘one size fits all’.
Measures are to be timely, targeted, and temporary. Plus structural
stimuli measures for four broad categories: labour markets (20%),
businesses (30%), research and investments (30%) and household
income (20%).
16
EU Policy responses to the crisis
•
•
•
•
Commission-led initiative to invest 5 bn euros in key energy and
internet infrastructure projects in 2009-2010.
Front-loading of structural funds / 6 bn euros
De Larosiere Report: reform of EU’s financial supervision. The
report was submitted in February 2009 containing 31
recommendations. Among them, the creation of an EU Systemic
Risk Council responsible for macro-prudential supervision in the
EU. Legislative proposals by the Commission are expected to
follow.
Global actions: G 20.
17
EU Policy responses to the crisis
•
•
•
•
Exit strategy (out of fiscal stimulus packages) – secure
sustainability of public finances. Get back to medium term fiscal
targets as soon as possible. Full implementation of the Stability
Pact.
Preservation of the Single market / application of state aid rules /
avoid unfair competition among all EU Member States and EU
partners / avoid protectionist measures.
Intensifying the economic dialogue with our neighbour countries.
Participation to the increase of IMF resources which is the core
international institution in providing emergency funding.
18
EU support to neighbour countries
Regular instruments
•
•
•
•
Preserving economic stability in the neighbours of the European
Union is a key goal of the EU.
Under the regular (i.e. programmable) EU financing instruments
the EU provides financial support having clear macroeconomic
features.
These regular financing instruments are: the Instrument for PreAccession (IPA) designed for the pre-accession countries and
European Neighbourhood and Partnership Instrument (ENPI) for
the Eastern Partnership countries.
IPA has provided extended Community support to pre-accession
countries, mainly project / programme technical assistance.
19
EU support to neighbour countries
•
•
•
•
Budget support under the ENPI forms the second instrument of EU
support to Eastern Neighbourhood countries. In principle is
targeted to specific sectoral programmes rather than project
financing or technical assistance.
The Twinning and the Taiex instruments are also cooperation tools
between a public administration in a partner country and the
equivalent institution in an EU Member State.
The overall allocation for the ENPI instrument amounts to almost
€12 billion for the period 2007-2013.
Around 90% of ENPI funds will be used for bilateral actions, i.e.
country-specific initiatives and for regional actions involving two
or more partner countries.
20
EU support to neighbour countries
•
•
•
The remaining 10% of ENPI funds are reserved for specific new
areas of joint activity, namely cross-border cooperation (CBC)
with € 1.1 billion reserved for 2007-2013, and specific initiatives
like the Neighbourhood Investment Facility (NIF) with € 700
million reserved for 2007-2013.
Between 2007 and 2010 spending of ENPI has been designed as
follows: Armenia € 98.4 million; Azerbaijan € 92 million; Georgia
€120.4 million (additional funding up to € 500 million will be
available to cope with the consequences of the war in Georgia in
August 2008), Moldova € 209.7 million; Ukraine € 494 million.
Under the Eastern Partnership initiative, total assistance for the six
Eastern neighbours will gradually grow from € 450 million in
2008 to € 785 million in 2013, an increase of nearly 75%.
21
EU support to neighbour countries
Crisis instrument
•
•
•
Unlike the regular instruments of EC financial co-operation (IPA
and ENPI), Macro-financial assistance (MFA) to non-EU countries
has for the past two decades been an important Community crisis
response instrument.
It is a short-term crisis management instrument granting financial
assistance in response to exceptional external financing needs in
the balance of payments that are to a large extent – notably in the
present crisis – exogenous.
MFA accompanies IMF programs therefore it provides key support
to address residual external financing needs. For this reason the
existence of an IMF program and a smooth cooperation with the
IMF are important for the launching of an MFA operation.
22
EU support to neighbour countries
•
•
Financing is provided in support of the implementation by the
recipient of the adjustment and short-term reform measures
designed to remedy the temporary difficulties. Therefore MFA
operations may integrate specific EU economic policy conditions
reviewed before the payment of each instalment of the assistance.
The mixed nature of MFA (possibly combining loans and grants)
allows the assistance to be tailored according to the specific
macroeconomic circumstances of the beneficiary country. In
particular, when deciding on the mix of loans and grants, the
capacity of the recipient countries to service its debt is taken into
account along with other criteria arising from the EU legislation
know as the ‘Genval criteria’.
23
EU support to neighbour countries
The total amount of MFA operations for the period 1990-2008
amounted to € 5.2 billion out of which € 770 million were grants.
MFA amounts disbursed by year,
in EUR million
1,178
695
305 245 330
421
175 195
392
136 160
141 203
32 66.5 61 20 40
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
•
24
EU support to neighbour countries
•
Several MFA operations were applied to 23 countries in total for
the period 1990-2008.
MFA 1990-2008, disbursements, Distribution by region
Mediterranean
13%
NIS
15%
Central
European
Candidate
Countries
53%
Western
Balkans
19%
25
EU support to neighbour countries
•
•
MFA operations are in principle time consuming to put in motion,
as each operation is a stand-alone legislative proposal requiring
several stages (including Member states consent, and European
Parliament hearing) before its actual enactment by the Council of
Ministers.
The EU is monitoring very closely the economic situation in
neighbouring countries and in close cooperation with the IMF and
other international organisations is ready to assess any potential
scope for future MFA operations.
26
EU support to neighbour countries
•
•
•
Conclusions
The economies of the east neighbour countries most integrated into
the world economy and most liberalised were the hardest hit. This
does not imply protectionism and autarky but a need for policies
designed to counterweigh the negative shocks arising from
(beneficial) greater global integration
The severe crisis has changed near term prospects, but should not
be allowed to derail the economic reform process which leads to
prospects of sustainable welfare gains in these emerging and
developing economies.
Macroeconomic stabilisation factors failed to insulate from the
crisis but enabled the countries to implement policies that
cushioned initial shocks. Well-designed fiscal policy tools and
frameworks plus a consistent exchange rate policy are of
particular importance.
27
EU support to neighbour countries
Conclusions
• Growth models that relied more on primary sectors were
seemingly more affected by the downturn, calling for intensified
efforts to diversify growth sources.
28
Thank you for your attention!
29