Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

3rd Craft, Trade and SME Summit

Luxembourg, 23-24th April 2004

Accession Countries on the Eve of EU EnlargementPeter 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

Gross Domestic Product (GDP)annual changes in % against previous year

2

5.07

2.0

4

1.6

3.2

4.24.54.5

4.06.96.25.4

3.73.44.5

43.53.0

1.0

7.39.3

0.8

2.8

0.8

4.3

3.94.94.5

3.78.97.44.8

3.42.24.03.72.92.9

4.0

4.75.2

1.1

0.3

1.4

5.2

3.04.94.8

2.56.86.16.0

2.22.94.41.43.52.0

Serbia and Montenegro

RussiaUkraine

EU(15)

Macedonia

Austria

Croatia

CEEC-10RomaniaBulgaria

CEEC-8Lithuania Latvia Estonia

CEEC-5SloveniaSlovak RepublicPolandHungaryCzech Republic

Forecast2005200420032002

2.2

3

4.66.5

2.4

43.5

4.14.5

4

4.26.66.25.9

3.93.5

54

3.93.5

3

Real per capita GDP in ACsEU(25) average = 100

0

10

20

30

40

50

60

70

80

90

100

1995 2000 2003 2004 2005 2010 2015

CZ HU PL SK SI EE LV LT

Note: Projection assuming a 2 percentage points growth differential

with respect to the EU(15) after 2003.

4

Productivity in ACs and EU(15)Index 1995=100

90

105

120

135

1990 1992 1994 1996 1998 2000 2002

GDP(ACs) Employment(ACs)

Productivity(ACs) Productivity EU(15)

Productivity growth in EU(25) will accelerate: +23

5

Productivity in ACs and EU(15)GDP per employed persons, EU(15) = 100, year 2003

Productivity level in EU(25)

will drop by 7% after

accession compared to EU(15)

6

Consequences of EU accession for ACs:

GDP growth

Facit:

Genuine growth forecasts now hardly possible

Higher GDP growth expected in the medium and long run

No immediate direct growth effects (year 2004) expected

The recent catching-up processes will continue

European economy slowly recovers from stagnation

highly integrated ACs profit from the EU recovery as well

Accelerated GDP growth after 2005 possible

7

5

8

85

21.5

83

2.23.52.9

3.5

352

8

107

32

115

14

2.8

482

6.93.5

9.4

13.65.2

2.41.5

15.32.4

-1.22.91.4

5.68.50.84.70.1

16.5Serbia and Montenegro

16.0Russia0.8Ukraine

1.4Macedonia2.2Croatia

22.5Romania5.8Bulgaria

0.3Lithuania 1.9Latvia 3.6Estonia

7.5Slovenia3.3Slovak Republic1.9Poland5.3Hungary1.8Czech Republic

Forecast2005200420032002

Inflation (consumer prices)annual changes in % against previous year

8

Consequences of EU accession for ACs:

Inflation

Facit:

Higher interest rates as a reaction to inflationary pressures may pose a break on the future GDP growth

Price levels temporarily increase (except Slovenia)

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

9

-14

-12

-10

-8

-6

-4

-2

0

2

CZ EE HU LV LT PL SK SI

2000 2001 2002 2003 2004 2005

Government deficit (= „-“) in % of GDP

Maastricht (3% des BIP)

10

0

10

20

30

40

50

60

CZ EE HU LV LT PL SK SI

2000 2001 2002 2003 2004 2005

Government debt in % of GDP

Maastricht (60% des BIP)

11

Consequences of EU accession for ACs:

State budgets

Facit:

Expected anti-inflationary measures and government deficit reduction programs may well result in lower GDP growth in the short- and medium run

Revenues from trade tariffs drop Costs due to the implementation of

‚acquis‘-regulations increase Contributions to EU budget from 1 May Co-financing of EU projects and

agricultural subsidies Revenues from project-related transfers

uncertain (mainly 2004) The already high government deficits

may well grow Consolidation requirements may result

in more restrictive fiscal politicies

12

FDI stocks in ACs, Ukraine and Russia, 2003

55.8

38.8

72.3

16.5

31.826.2

30.225.2

20.1 1914 13.5

0

500

1000

1500

2000

2500

3000

3500

4000

CZ HU EE SI LV PO SK LT BU RO UKR RUS0

10

20

30

40

50

60

70

80

90

per capita (EUR) in % of GDP EU FDI share

17

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

18

80

85

90

95

100

105

110

115

120

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04

CZ HU PL SK SI

Nominal exchange rates, Jan. 2000=100(national currency vis-à-vis EUR)

20

Consequences of EU accession for ACs:

Participation in ERM II and EMU accession

Facit:

Euro accession 2007 at the earliest (EE, LT, LV, SI)

Resp. only after 2008 (CZ, HU, PO, SK)

After initial enthusiasm most ACs are nowadays rather cautious

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

21

15

15

98.5

3513.5

12.67

13

14.2111010

14.66

196

8.2

15

89

3614

13.48

14

14.7121010

15.26.31620

68.2

14

8.59.5

36.714

13.07.0

14.5

14.612.710.810.0

15.06.7

17.419.5

5.97.8

13.8Serbia and Montenegro

8.0Russia10.1Ukraine

31.9Macedonia14.8Croatia

13.8 CEEC-108.4Romania

17.8Bulgaria

15.0 CEEC-813.8Lithuania 12.0Latvia 10.3Estonia

15.3 CEEC-56.4Slovenia

18.5Slovak Republic19.9Poland

5.8Hungary7.3Czech Republic

Prognose2005200420032002

Unemplyoment rates (LFS)annual averages in %

22

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

23

Consequences of EU accession for ACs:

Labour market and migration

Facit:

Labour market will remain the major challenge for the EU in future as well

East-west migration waves are not expected

Lasting high unemployment in most ACs (‚jobless growth‘)

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

24

> 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)

Summary conclusions