1. Szegedi Tudományegyetem
Challenges in CEE and Baltic post-socialist EU member states Challenges in national and international economic policies 3rd Central European PhD Workshop on Economic Policy and Crisis Management Doctoral School in Economics, University of Szeged 13 April 2018, Szeged, Hungary Session 1 – Finance and global challenges Room: KO 101, CoChair: Beáta Udvari, Chair: Balázs Kotosz
Kerényi Ádám
Szegedi Tudományegyetem

2. Introduction
I am a junior research fellow at the Institute of World Economics of Hungarian Academy of Sciences.
I am a controller at SOLVO Biotechnology
I teach at the University of Szeged.

3. Content of my presentation
Introduction
Theoretical framework
Scope of my research & research questions
EU as a convergence machine
Facts
11 post-socialist EU member states
The crisis macroeconomic effect on the CEE region
Convergence of the 11 countries to the EU15
Convergence of the 56 NUTS2 region to EU average
Potential impacts
The impact of cohesion policy : model simulations with Quest III
Conclusion, future research agendas

4. THEORETICAL FRAMEWORK

5. Introduction
Since joining to the European Union CEE and Baltic countries have experienced a historically never-experienced capital inflow due to the EU-funds.
My research questions are:
What are the results in terms of convergence?
What would have happened without those historically never-experienced EU-funds?
What can we learn from the previous periods?
Can the EU funds be used as quick fix to the problems?

6. EU as a convergence machine?
Goal 1: Increase convergence
Supporting growth and employment in the less developed regions
Eligibility criteria:
Regions: GDP/capita less than 75% of EU average
Individual countries: GNI/capita less than 90% of EU average
Goal 2: Enhance competitiveness

7. Cohesion policy
In its Article 174, the Treaty on European Union mandates the Union to "… develop and pursue its actions leading to the strengthening of its economic, social and territorial cohesion. In particular, the Union shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions". Cohesion policy is the European Union's main instrument to achieve this objective, based on the European Regional Development Fund (ERDF), the European Social Fund (ESF), and the Cohesion Fund (CF).

8. Introduction – latest publication
The book is available:

9. FACTS

10. The scope of my research is the 11 post-socialist EU member states
After the fall of Berlin wall, following tearing down the oppressive socialist system the Central-East European (CEE) and Baltic countries distinguished themselves with their commitment to capitalist regime.
Source: Eurostat

11. Cohesion policy From the total funds available:
55.1% went to EU12 (new entrants)
44.2% to V4+SLO
Baltic states and Hungary: the biggest beneficiaries
: 11 CEE countries (without co-financing)
EUR 176 bln
14.8% of GDP
Source: European Commission

12. Important support to public investment
Cohesion Policy provided more than 50% of government capital investment in some countries
57.1
52.1
50.5
42.5
40.9
39.4
38.7
34.3
27.5
25.1
24.5
18.9
7.1 7
4.4
3.9
2.5
1.7
1.1 1
0.8
0.7
0.4
0.2
COHESION POLICY FUNDING AS A % OF GOVERNMENT CAPITAL INVESTMENT EU 28 = 6.5% AVERAGE
Source: European Commission

13. Country group-level convergence
GDP per capita in market price
PPS (EU-15 = 100, 2008 & 2016)
European periphery (PIGS): convergence slows down in the early 2000
New-comers: heathy convergence up to the crisis
Post-crisis: period: convergence slowed/stopped
Convergence continued But! At a slower rate
Significant differences among countries
Source: Surányi, 2018 and Eurostat, 2017

14. The crisis macroeconomic effect on CEE
GDP at 2010 reference level
Sources: AMECO, EUROSTAT

15. Country-level convergence
GDP per capita in PPS (EU-15 = 100, 2008 and 2016)
Source: Eurostat, 2017

16. Regional convergence
PPS GDP/capita in PPS NUTS 2 HU and PL regions (EU28=100, 2008 &2015)
Real convergence remains far from being complete
50%
Source: Eurostat, 2017

17. Low income regions
Low income regions, i.e. those NUTS2 regions with a GDP per head in PPS below 50% of the EU average The low income regions cover parts of Bulgaria, Hungary, Poland and Romania. Most of the economic issues experienced by the low income lagging regions are historic in origin; the countries on the eastern fringe of the EU were amongst the latest to accede to the union, and investment and infrastructure has tended to be concentrated around the capital city or in regions that adjoin other more established Member States.

18. CEE’s lagging regions Hungary’s lagging regions suffer from:
under-investment,
low innovation,
low levels of educational achievement, and
low levels of productivity
slow growth in high value, high skilled industries.
Region-specific differences may reflect the differences in the effectiveness of EU-fund absorption
Source: Eurostat, 2017

19. THE questIII model on POTENTIAL IMPACTS
THE questIII model on POTENTIAL IMPACTS

20. The QUEST model and its impact channels
The model is developed by the Directorate General for Economic and Financial Affairs of the European Commission. The model simulates the impact of policy interventions on a large number of economic variables relevant to cohesion and rural development policies such as GDP, employment, wages, productivity, or investment from the private sector. The model belongs to the class of New-Keynesian dynamic general equilibrium (DGE) models that are now widely used in economic policy institutions. The model describes fully the dynamics of the system in a general equilibrium framework where changes in the conditions for a particular block are transmitted to the other blocks through various market interactions.

21. The QUEST model and its impact channels
The model is regularly used for the analysis of key fiscal and monetary policy scenarios, for assessing the impact of the structural reforms for contributing to the economic projections of DG ECFIN. This type of approach allows to examine the outcome of various policy scenarios taking into consideration the manner in which interventions affect the allocation of resources throughout the economy, thus enabling an analysis of policy impacts at the macroeconomic level The model provides a fully micro-founded, integrated and optimization-based representation of the economies of the Member States.

22. The QUEST model and its impact channels
The analysis based on the Quest model contributes to the understanding of the macroeconomic potential impacts of the cohesion and rural funds invested in 27 Member States during the period QUEST is structured around building blocks which represent the behaviour of fundamental economic agents and interactions.

23. QUEST – Main building blocks
The equations, assumptions and calibration of the model are provided in the papers cited above (see also the list of references in annex). The diagram in Figure 3 summarizes the main building blocks in the model and their interactions.
The model features two main types of firms: producers of intermediate and final goods and services, and R&D producers of patents. Firms produce goods and services by combining technology, physical capital and labour. The production technology is enhanced by acquiring new processes from the R&D sector which generates innovation by mobilising resources (primarily highly skilled labour). This in turn increases the productivity of producers of goods and services.
Source: DG REGIO.

24. The impact of cohesion policy 2007-2023: model simulations with Quest III
Impacts on GDP of cohesion and rural development policies, (% deviation from baseline)
Source: DG REGIO.

25. Model simulations with Quest III Results
Cohesion and rural development policies impacts on selected indicators, 2015 and 2023 (% deviation from baseline)
Source: DG REGIO.

26. Conclusion
Disparities PPS GDP/capita in PPS NUTS 2 regions (EU27, )
Source: European Commission

27. Conclusion
After 2009 the CEE and Baltic regions very hard, there have been major changes in their policies.
After 2004 the European Union CEE and Baltic countries experienced a historically never-experienced capital inflow due to the EU-funds.
The convergence of the region towards the core states’ economic development is impressive in country-group and country level, but in regional level the convergence process is taking part more slowly.
The lagging regions’ key geographical characteristic is that they are located on the eastern fringe of the European Union.

28. Further research agenda
My future goals are
to continue this research on the European integration by attending workshops, conferences and summer schools
Examine the use of the funds
Focus more on NUTS2-level data
Publish the results

29. Thank you for your kind attention!