The impacts of the economic crisis on Central-Eastern Europe, policies, trade union

responses

PERC-ITUC Trade Union Forum

Minsk 26-27th October 2009

Béla Galgóczi

ETUI

bgalgoczi@etui.org

2

Structure of presentation

● Basic facts and prognoses on the downturn in Europe● Labour market impacts – huge variety across countries● Factors of vulnerability of Central and Eastern Europe● Crucial policy question and role of trade unions: who pays

the bill, what principles of burden sharing (international: debtor/creditor, national: spheres of economy; capital/labour, within groups of workers

● Flexibility and its different forms (forced and negotiated)● The role of the IFI-s in CEE ● Some employment policy tools (good practice cases)● Conclusions

3

Gross domestic product in 2007 and prognosis for 2009 (annual growth)

-13-11

-9-7-5-3-113579

11

HU IT DK FR PT DE EA15/16

SE BEEU 27UK AT NL MT ES GR CY FI LU IE RO SI BG CZ PL EE LT LV SK

2007 2009

Data Source: European Commission (2009).

4

Facts on the downturn in I.Q. 2009 – an even bleaker picture

● The downturn in the first quarter of 2009 was 18.6 % in Latvia, Estonia suffered a 16% drop and Lithuania 11%.

● Only Poland has managed limited growth in the I.Q – showing also that the region is not equally effected (EBRD Forecast for 2009: +1.3%)

● Lithuania 2009 II.Q. GDP figure: with a 22.4% drop (year-on-year) this is the largest GDP fall ever measured in peacetime Europe

● In July 2009 the Latvian government and the IMF reached a financing agreement on basis of a forecasted 18% GDP decrease in 2009.

● Indeed a dramatic picture in the Baltic states● Ukraine is also hit hard – GDP growth 2009: -14% (EBRD, Oct 2009)● Belarus on the hand shows a slight downturn, GDP growth 2009: -3%

(EBRD, Oct 2009 Forecast).

5

Gross domestic product in IV. Q 2008 and in I. Q. 2009 (year on year basis)

Data Source: European Commission (2009).

-20

-15

-10

-5

0

5

LV

EE

L

T

IE*

SI*

FI*

DE

RO

S

E

SK

IT

LU

* H

U

NL

EU

27

DK*

UK

PT

B

G

CZ

F

R

BE

E

S

AT

E

L

CY

P

L

MT

in % IV.quart.08

I.quart.09

6

Unemployment rate

02468

101214161820

ES

L

V

EE

L

T

IE

S

K

HU

F

R

PT

S

E

EU27

E

L

BE

P

L

FI

DE

I

T

UK

M

T

BG

L

U

RO

C

Z

SI

DK

C

Y

AT

N

L

in % May 2008

May 2009

7

Increase in the number of unemployed by Q2 2009, Q1 2008 = 100

100

150

200

250

300

350

400

450

8

Labour market performance during the crisis: huge differences across EU member states

While the level of unemployment is highest in Spain, the increase in one year (Q1 2008 – Q1 2009) was most dramatic in Estonia (to 400 % of pre-crisis level) followed by Lithuania and Latvia.

Ireland and Spain with close to 200% are also seriously effected

Hungary features the EU average

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Change in GDP, employment and unemployment in DE, HU, ES – 2009 1Q/2008 1Q

Data Source: European Commission, Eurostat LFS, 2009

-7

-5

-3

-1

1

3

5

7

DE GDP DEEMPL

DEUNEPL

HU GDP HUEMPL

HUUNEPL

ES GDP ESEMPL

ESUNEPL

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The vulnerability of Eastern Europe

● Macroeconomic imbalances (deficits in current account, government debt, household debt and corporate debt)

● chronical dependence on external financing (in forms of FDI, credits (banks and IFI-s), financial investments (government and corporate bonds, other financial assets)

● and a high level of economic and trade integration with the EU15 (linked to the Western economic cycle)

● Effects of labour mobility (return migrants in crisis; shrinking remittances)

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

Current Crisis

Past Crises Episodes

2007

2010-112009

Minimum during crisis

Pre-crisis After crisis

Net Capital Inflows to Emerging Markets(in percent of GDP)

Global deleveraging resulted in fast transmission to emerging markets.

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Real GDP growth, 2005 -2010

0.6

5.5

-5.4

6.3

6.3

1.4

5.0

4.8

-3.1

7.7

7.2

-1.7

-15.7

-3.4

9.210.2

8.4

-17.5

-12.5

-7.5

-2.5

2.5

7.5

12.5

2005 2006 2007 2008 2009 2010

-17.5

-12.5

-7.5

-2.5

2.5

7.5

12.5

Baltic countries

Countries with CA deficits inferior to 7

percent of GDP

Countries with CA deficits superior to 7

percent of GDP

… … as did countries with lower current as did countries with lower current account deficit.account deficit.

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The first phase: the effects of financial turbulences

● The immediate effect of financial turbulences, frozen capital flows, paralysed financial markets

● This phase has ignited wide range fears of collapse or state bankruptcy in many countries of the region

● This seems to be over now…

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The vulnerability of Eastern Europe

● Capital flows frozen, financial markets in eastern Europe dried up, capital retreats to home markets

● Devaluation of national currencies (for CEE NMS up to 20-25%),

● Tensions in countries with pegged exchange rate (Baltic states, Bulgaria)

● Daily debt financing paralysed, credit ratings of CEE countries downgraded, debt of Ukraine, Latvia, Romania rated as `junk-bonds`

● At the peak of the crisis (March 2009) Ukrainian state bankruptcy was priced to a probability of 40% shown by `credit default swap spreads` (CDS); in case of Latvia it was 10%

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The vulnerability of Eastern Europe

● Households and enterprises often indebted in foreign currency – with debt burdens due to weaker national currencies and higher banks fees increasing

● Families in desperate financial situation – a burning social problem

● The banking sector in CEE is 80% in foreign hands and foreign banks were often reluctant to bail out their CEE affiliates

● The situation is alarming, mostly in the Baltic states

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Non-performing loans in Central Eastern Europe

● The amount of private credits compared to GDP grew by 200% in the last couple of years in the CEE region.

● Non-performing loans are at alarming levels in most countries of the region, the stimate of the IMF for the end of 2009 is the following, by country:

● Estonia 15 %,● Lithuania 15-20%, ● Latvia 25 %, ● Hungary and the Czech Republic: 5 % ● Poland: 10% (mostly because of enterprise loans)● Ukraine: 50 %, ● Russia: 30 %.

A potential for further tensions....

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The second phase of the crisis: the effects of one-sided and deep economic integration

● High dependence on foreign capital, investments and exports to Western Europe makes the region vulnerable…

● The second feature of vulnerability has deeper roots and possibly longer term effects

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Economic and trade integration with the West as factor of dependence for CEE

● New member states from Central and Eastern Europe (CEE), in particular Visegrad Four (V4) countries – CZ, HU, PL, SK –particularly affected by the crisis due their high economic and trade integration with Western Europe, especially DE.

● Poland is less exposed due above all to its larger domestic market and less export dependence

● Particlularly effected is the large automobile sector with its suppliers, including chemical companies (SK especially).

●

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Baltic states in focus

● The Baltic states are hit hardest by the crisis● A 20% GDP drop is dramatic and involves substantial

sacrifice from the population (as a result of unsustainable growth strategies in past)

● Important is to have a future perspective and a socially just distribution of the burdens

● Non of this is happening with the crisis management now

● Maintaining the currency peg (or board) means adjustment costs will be more concentrated

● Why the public sector is so much under pressure?● Within public sector, why education (that is key for

future)?

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Where is Europe in this situation? – no visible strategy

● Europe is paralysed in regard to CEE NMS and EU neighbourhood countries, as well

● Europe in lack of proper institutions and resources to cope with a crisis of this magnitude

● The leading role has been left to the IMF with adverse conditions

● Severe conditions for fiscal tightening – to cut public spending: Latvia 20% cut of public sector wages, 10% cut of pensions, social welfare schemes)

● Lithuania: 9.5% cut of public sector wages● Hungary: scrapping 13th month wage in public services● Refusal of a crisis intervention fund for CEE countries was a

negative message from the EU to CEE NMS and to the whole Eastern Europe (beyond the EU)

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The role of the IFI-s in the region

EU – IMFWhile Europe sets on a wide range of public resources to offset the effect

of the crisis (stimulus packages, labour market schemes, more government deficit), countries in CEE in the deepest crisis need to apply brutal fiscal tightening

Europe and the world seem to abandon neo-liberal economic doctrine, but this is being applied in CEE as crisis management

One thing is however true: restoring sound public finances (budget and current account deficit) is key

The question is how and in what burden sharingRole of social partners in finding a just burden sharing would be key

receipee: cut spending at any price > this makes the downturn even more severe

Even so, it is true that the IMF showed certain flexibility

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IMF Support for European Countries Affected by the Global Crisis(As of August 2009)

Country IMF Loan Size Approval Date

Hungary $15.7 billion November 2008

Ukraine $16.4 billion November 2008

Iceland $2.1 billion December 2008

Latvia $2.35 billion December 2008

Belarus $2.5 billion January 2009

Serbia $0.5 billion January 2009

Romania $17.1 billion May 2009

Poland $20.6 billion May 2009 – Flexible Credit Line

Bosnia and Herzegovina $1.57 billion July 2009

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The role of the IFI-s in the region (example Latvia)

With the consequtive downgrading of the growth prospects for LATVIA the government deficit condition of the disposability of the credit line had been modified: from 5% of GDP to 7%, then to 10% - this is still a huge burden a a negativ spiral is threatening!

The IMF showed some flexibility and itself goes through a learning process as it now supports the abolition of the 23% flat tax (which was previously welcomed and copied as a competitiveness tool)

A sustainable development track with managable social sacrifices and without eating up future perspectives (education, health care) is needed

This is not viable without an active – and controlled – support of the EU

A concept is missing however – it is only fire-extinguishing that happens

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Challenge for trade unions: what burden sharing in crisis

With 20% drop of GDP burdens are inevitable, but who pays the bill – a just burden sharing should be the central issue for trade unions:

- - different levels – national, branch, enterprise- - national level: macro-economic adjustment (conditions for IFI

intervention, exchange rate policy, policy towards crediting banks, labour market adjustment /forms of flexibility)

- Learn from bad example: focusing the costs on the public sphere in Latvia> alternative: tougher policy with crediting foreign banks> devaluation of currency spreads burdens across the whole population > leave room for social policy> tax reform more burden on the wealthier strata (progressive tax+property tax)

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Challenge for trade unions: what form of labour market flexibility

National level: labour market policy; branch and enterprise level: negotiated forms of flexibility by collective agreements > wage policy: preserve purchasing power during crisis

Thee main factors of flexibility:- - General labour market flexibility (EPL)- - in form of low general level of employment protection- - or high level of non-standard (precarious) jobs- - irregular forms of flexibility (non-payment of wages, informal

economy) – strong role in CEE/SEE

- - Specific labour market tools to cushion the impact of the crisis (good practices, first of all Germany)

- - Role and strength of social actors to exploit internal flexibility at plant level (collective bargaining)

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Shortened working time scheme in Germany: the good practice case in Europe

Germany: two main levels of responses:Labour market (LM) policy instrument short-time work = ‚Kurzarbeit‘

(`Kurzarbeit Null`): State subsidy of wages for inactive workers or employees working shorter

hrs than stipulated in coll. agreementsRecent changes: period of entitlement extended to 18 months (open to a

further extension to 24 months); temporary agency workers includedYearly average stock for 2009: 1.2 Mn employees (forecast October

2009)

Collective agreements (sectoral, company-level) on flexibilisation/reduction of working time (WT), e.g. ‚flexible WT accounts‘ at Volkswagen;

● Advantages:- Workers remain in employment - Possibility of voc. training (funded by Public Labour Agency)

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Trade union focus on proper forms of flexibility

● Given the weakness of labour relations and actors in the region,

more emphasis needs to be given to public labour market schemes to cushion the impact of the crisis on employment (learn from good practices, e.g Germany /`Kurzarbeit`/ Italy : `cassa integrazione`)

The EU should also support such schemes in the region

Fight against irregular forms of flexibility, above all against the non-payment of wages and the spread of precarious work

Collective agreements on branch and company level: exploit internal flexibility in order to avoid dismissals

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`Lessons` drawn from the crisis in the region

Europe and the world seem to abandon neo-liberal economic doctrine, but this is being applied in CEE as crisis management

Hungary: `more neo-liberalism needed`, lesson drawn from vulnerability during crisis: `down with the welfare state!`

Failure was the lack of ability to integrate low skill, disadventagious employee groups on the labour market

Slovakia: success with liberalisation, neoliberal policies, however a vulnarable – mono-industrial stucture, Eurozone accession at an overvalued exchange rate; high export dependance – still neoliberal foundations not questioned;

Baltic states: the real disaster, but no systemic response, just austerity based adjustment, above all cuts in the public (service) sector; the only remarkable step: abolishing the flat tax rate system in Latvia (proposed also by the IMF)

This is a mixed picture, no systemic conclusion, no considerations about a sustainaable future convergence strategy

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Conclusions

● Sharp and deep drop in demand – paralysed financial institutions

● European response: not satisfactory and not properly co-ordinated

● The leading role in the region left to the IMF● The current situation perfectly illustrates the adverse

effects of an economic integration without social and political integration in the EU

● This is also a bad message to EU accession countries and countries with a future prospect of EU membership

● Weak social welfare systems in the CEE region are being further dismantled. Perversely the failed neo-liberal economic doctrine seems to be further strengthened in the new member states, while developed Western economies seem to leave it behind.

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Conclusions

● With the acute financial turbulences (e.g. exchange rates, capital extraction) over now /really over??/,

● Emphasis must be given to the employment impacts● Here the worse is still to come and employees in most

CEE and in SEE countries even more are unprotected● Effective labour market policy is needed● Just burden sharing is needed● What sustainable growth model for the region after crisis?

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Conclusions

● W