World Bank EU 10 Regular Economic Report Safeguarding Recovery Brussels, 16 July 2010

MESSAGES Return to growth but volatile financial markets, fiscal pressures, and high unemployment cast shadow on future prospects Bolstering financial sector stability, shoring up fiscal sustainability, and tackling structural unemployment are essential for safeguarding the recovery

Return to Growth

Back in positive territory … Source: Eurostat, World Bank staff calculations Year-on-year GDP growth in EU10 and EU15, percent

… helped by the base effect … Source: Eurostat, World Bank staff calculations Quarter-on-quarter GDP growth in EU10 and EU15, percent

… with continued contraction in some countries Year-on-year GDP growth in EU10 and EU15, percent Source: Eurostat, World Bank staff calculations

Recovery will be slow … Source: Convergence Program Updates 2010, EC Spring Forecast 2010, World Bank Forecasted GDP growth rates, percent

… synchronized with EU 15 … Source: Eurostat, World Bank staff calculations EU10 and EU15 GDP growth, exports growth, credit growth, percent

… reliant on net exports in 2010 … Source: EC Ameco database, World Bank staff calculations Forecasted contribution of net exports and domestic demand to GDP growth in EU10 and EU15 countries, percent

… and public investment in 2010 and 2011 … Source: EC Ameco database, World Bank staff calculations Forecasted growth of consumption and investment in EU10 and EU15 countries, percent

… and varied within EU 10 Source: World Bank Forecasted GDP growth rates for EU10 countries, percent

Volatile Financial Markets

Risk appetite receding … Source: Bloomberg, Reuters, World Bank staff calculations Notes: Decrease indicates deterioration Asset class performance, percent change

… and capital flows stalling in May … Source: DECPG, World Bank staff calculations Capital inflows to global emerging markets, USD billions

… and negative credit growth to enterprises in most countries Source: ECB, World Bank staff calculations Credit growth from December 2009 to April 2010, percent

Fiscal Pressures

As financial markets focus on sovereign debt … Source: Eurostat, World Bank staff calculations

Forecasted general government overall and primary deficits in EU10 and EU15 Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, World Bank staff calculations … governments reduce fiscal deficits gradually …

Forecasted general government debt in EU10 countries and EU15 Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, World Bank staff calculations … to keep public debt sustainable

High Unemployment

Unemployment remains high … Source: EC Ameco database, World Bank staff calculations Forecasted unemployment rates for EU10 countries, percent

… especially for young and less educated … Source: Eurostat, World Bank staff calculations Change in unemployment rate by subgroup, percent

… and in Latvia, Estonia, Lithuania & Slovakia … Source: EC Ameco database, World Bank staff calculations Forecasted unemployment rates, percent

… with employment falling more than output in few countries … Source: Eurostat, World Bank staff calculations Change in output vs. change in employment, percent

… even though wages are moderating in most countries Total nominal hourly labor costs, % change, yoy, working day adjusted Source: Eurostat, World Bank staff calculations.

Safeguarding Recovery

Answering the 1.7% question … Potential growth in 2007 and 2011 by EU member country Source: European Commission Ameco database, World Bank staff calculations.

… requires a stable European banking system with stable exposure to EU 10 region … European Banks’ 5-year CDS (bps) Source: Bloomberg, Datastream, World Bank staff calculations

… and lower expenditures and higher revenues … Composition of fiscal deficit reduction from 2009 to 2011, percent of GDP Source: Convergence and Stability Program Updates from January/February 2010, EC Spring Forecast 2010, World Bank staff calculations

… to keep borrowing costs low … Yield curves, percent Source: Bloomberg, World Bank staff calculations

… as well as more people working longer… Employment rate of year-olds, EU27=100 Source: Eurostat, World Bank staff calculations.

… in productive jobs Change in employment by a skill level from 1Q 08 to 1Q 10, percent Source: Eurostat, World Bank staff calculations.

… also to get ready for the euro area Compliance with convergence criteria, March to May 2010 Source: Poland Ministry of Finance, World Bank staff calculations.

THANK YOU For more information visit : www. worldbank. org / eca / eu 10 rer worldbank. org