Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies 3rd Craft, Trade and SME Summit Luxembourg, 23-24th April 2004 Accession Countries on the Eve of EU Enlargement Peter 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 Serbia and Montenegro Russia Ukraine EU(15) Macedonia Austria Croatia CEEC-10 Romania Bulgaria CEEC-8 Lithuania Latvia Estonia CEEC-5 Slovenia Slovak Republic Poland Hungary Czech Republic Forecast

3 Real per capita GDP in ACs EU(25) average = 100 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 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

Serbia and Montenegro 16.0Russia 0.8Ukraine 1.4Macedonia 2.2Croatia 22.5Romania 5.8Bulgaria 0.3Lithuania 1.9Latvia 3.6Estonia 7.5Slovenia 3.3Slovak Republic 1.9Poland 5.3Hungary 1.8Czech Republic Forecast 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 Government deficit (= „-“) in % of GDP Maastricht (3% des BIP)

10 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

FDI stocks in selected accession countries (EUR bn) end-2003, shares of key investing partners in %

14 Unit labour costs (ULCs), exchange rate (EUR) adjusted, 1995 = 100

15 International comparison of unit labour costs PPP adjusted (Austria = 100)

16 Arbeitsproduktivität in der Industrie, MOEL und EU(15), Index 1995= MOEL-Industrieproduktivität wächst noch rascher, Beschäftigung geht zurück

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

19 Preisniveaus, EU(15) = 100

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

Serbia and Montenegro 8.0Russia 10.1Ukraine 31.9Macedonia 14.8Croatia 13.8 CEEC Romania 17.8Bulgaria 15.0 CEEC Lithuania 12.0Latvia 10.3Estonia 15.3 CEEC-5 6.4Slovenia 18.5Slovak Republic 19.9Poland 5.8Hungary 7.3Czech Republic Prognose Unemplyoment rates (LFS) annual averages in %

22 Unemployment rates by region (%), to to to to 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