1. Growth and investment in CEE
PERC
regional conference of economic experts
Budva, Montenegro 5-6 May 2016
Bela Galgoczi
European Trade Union Institute - ETUI

2. CEE-s are underperforming
Underperformance in terms of GDP and investments
Two major causes:
1/ EU crisis management practice is particularly harmful to peripheral middle-income economies
CEEs (exc: HU, HR) had no public debt problem and CEEs have no cost-competitiveness problem
STILL: austerity and a downward pressure on wages is applied (as graphs below will show)
2/ There is a longer term problem with CEE growth model:
Externally financed low wage based growth is out of steam
A change towards investment led innovation based growth model with higher value added content is necessary

3. EU: Wrong diagnosis, failed adjustment policy, social and labour market disaster and prolonged recession
The root-cause of the crisis was not a debt problem (exception Greece) – wrong diagnosis, wrong therapy
The crisis was due to economic imbalances that were accumulated in a decade
Adjustment is needed but more through the capital channel: one reason of the crisis was bad allocation of capital
Instead of this, therapy is focused on adjustment through wage reduction (not addressing the real cause, but creating harmful side-effects and also not fair) and time horizon is also flawed, result: double-dip recession

4. Also for most CEE-s… Policy of internal devaluation:
Direct intervention into wage developments by cutting and freezing public sector and minimum wages (HU, LV, RO)
Structural reforms of wage setting institutions to increase downward flexibility of wages
New European Economic Governance:
European Semester/European Imbalances procedure: half of the EU
Member states received recommendations
Troika /Memorandum of Understanding

5. Measures in countries under international surveillance, including HU and RO

6. Growth, wages, investments, FDI - all on downward trend /see graphs on next slides/
With the exception of Slovakia and Poland GDP level in 2015 is not much above pre-crisis level
In terms of real wage development a bipolar picture also in CEE, but apart from Bulgaria wages lag behind productivity (so wage moderation takes place)
Both public (exc: HU, HR) and private debt is lower in CEE than EU average and much lower than in crisis countries
Investments in all CEE at much lower level than before the crisis (exc: PL)
Foreign direct investments (FDI): downward trend
Share of FDI in total investments: also down
Role of EU transfers: upward trend, in HU near 6% of GDP and close to 100% of public investments= EU money

7. Change in real GDP in CEE countries, 2008 to 2015 (%)
Source: Calculated from AMECO database, GDP at 2010 constant prices. Note: 2015 figures are estimates.

8. Real compensation in the EU 2010-2014
ETUI: Benchmarking working Europe 2015

9. Development of real wages and productivity 2008-2014
Source: Authors’ calculations based on AMECO.

10. Gross government debt as a share of GDP (%), EU28 member states, 2010, 2015, increase from 2010 to peak value (p.p.)
Source: AMECO (UDGG series), own calculations

11. Private sector debt (consolidated) in the EU as share of GDP (%), 2008, 2014 and peak 2008-2014
Source: Eurostat (tipspd20 series), own calculations.

12. Gross fixed investment in CEE, as % of GDP, 2004-8 and 2015
Source: Calculated from AMECO database, using 2010 constant prices.

13. Investment rate (gfcf in GDP) 2007–2013, %

14. FDI inflow, EUR million (BoP, excl. SPEs)

15. FDI inflow in % of total investments (gfcf)

16. Net realised EU transfers in % of GNI in the bigger NMS (Czech Rep; Bulgaria, Poland, Romania, Slovenia, Slovakia, Hungary)

17. Concluding remarks
GDP growth below potential, convergence is out of steam
Instead abandoning ‚low wage competitiveness‘ model, this is being reinforced
Austerity and risk avoidance by banks result in low investment activity
Foreign direct investments (FDI): downward trend – this a longer term trend
Share of FDI in total investments: also down
EU transfers provide a large part of public investments
ALL THIS is NOT SUSTAINABLE!!
A new growth model, investment and wage led growth, upgrading of the economy is needed