1 Competitiveness in SEE and Prospects in the Catching-Up Process: A Regional Overview Peter Mooslechner Director Economic Analysis and Research Department Oesterreichische Nationalbank National Bank of the Republic of Macedonia Skopje – May 30, 2008

2 Overview The Starting Point: Initial income gap ….. but signs of catching-up Underlying factors Elements of price and cost competitiveness The importance of the regulatory framework Factors of SEE competitiveness within Europe: Trade integration: Sectoral and geographical aspects Current account balance: Structural issues SEE: Attractiveness for foreign investors Where does the region go to? …plus some facts on Euroization in SEE

3 Income level still lower than in the EU-27, but income convergence under way…..

4 ….. although it will take some time Source: Eurostat, OeNB.

5 Most countries gained shares on world markets

6 Some Basic Factors Driving Competitiveness

7 Broadly stable real exchange rates in SEE …

8 … but rising ULC across the region

9 Clear improvements of the institutional framework

10 Competitive Advantages of SEE Countries Critical issue: „Hard factors“ point more towards a certain loss in price competitiveness But „soft factors“ draw a more favourable picture: Continuously improving infrastructure supports trade with the EU markets Geographical location, closeness to the enlarged EU EU accession process Progress in regional cooperation and integration Attractiveness for FDI

11 The Competitive Position of SEE within Europe: Elements of a Dynamic View

12 Progress in Trade Integration

13 Higher Share of Intra-Regional Trade

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15 Need for Structural Upgrading in the Medium Run

16 Technological Upgrading is Taking Place, but Structural Differences Remain

17 The Permanent Challenge of Trade and Current Account Balances

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19 External Deficits Across the Region

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21 High and increasing FDI stock

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23 Where does the region go to? SEE still with significant cost/price advantage compared to the European Union EU is main trading partner - but low share in total EU imports points to considerable growth potential Trade with the CEE-5 region as well as interregional trade is rising (and these regions show stronger growth than the rest of the EU) Specialisation of production on low-tech and basic goods sector faces strong competition from Asian countries (in particular China) Obvious need for technological upgrading to gain in long-term competitiveness

24 Euroization as a particular Feature of SEE?

25 Why Euroization in SEE Countries? Competitiveness is not only a question of wages, prices and productivity – it is also a question of the exchange rate Under certain (specific) conditions: Expectations are stabilized by fixed exchange-rate policies Historical experience: Austria’s “hard currency policy” – a particular example of pegging a country’s currency Today: ERM II and Monetary Union For most SEE countries the introduction of the Euro is still a long way to go People and policy makers might chose different ways to go Euroization is a peculiarity of this region

26  Survey conducted since 1997 Initially 5 Countries (Czech Republic, Hungary, Slovakia, Slovenia and Croatia) reduced to 4 Countries after Slovenia joining the Euro Area  NEW Geographical scope from autumn 2007 on  6 EU Member States: Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovakia  5 Southeastern European Countries: Albania, Bosnia and Herzegovina, Croatia, Former Yugoslav Republic of Macedonia (FYR Macedonia) and Serbia The Use of the Euro in Central, Eastern and Southeastern Europe – Survey Design (I)

27 The Use of the Euro in Central, Eastern and Southeastern Europe – Survey Design (II)  In each country about 1000 persons over the age of 14 are interviewed (in Poland only the population of the 10 largest cities); 2 waves per year (spring and autumn)  Overall 26 questions plus socio-demographics, including also nonregular questions on specific topics (for example on foreign currency loans)  Central questions: ■ amounts and composition of foreign currency cash holdings ■ foreign currency denominated deposits ■ as well as motives for holding them

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32 Summary of First Survey Results The euro plays a predominant role in foreign currency denominated assets held by residents throughout the region. In general, euro cash holdings are more important in Southeastern European Countries than in EU Member States. Key motives to hold euro cash: –Southeastern Europe, BU and RO as a store of value, –other EU Member States for holidays and shopping purposes abroad.

33 ■ Focus on European Economic Integration Main results will be provided in an article on a regularly basis (semi-annual); first one in FEEI 1/2008 (July) ■ Research and information platform on the internet (July 2008)  Details on the Survey, sample, technical report, questionnaire  Selected results and complete list of publications  ceec.oenb.at ■ The International Role of the Euro Box prepared for the European Central Bank’s report ■ Occasional newsletter on special topics ■ Ongoing research activities ■ Stix, H Euroization: What Factors Drive its Persistence? Household Data Evidence for Croatia, Slovenia and Slovakia. OeNB Working Paper No ■ Presentation of papers by Doris Ritzberger-Gruenwald and Helmut Stix at the Annual Meeting of the Austrian Economic Association 2008 Where to find more information…..

34 Thank you very much for your Attention!