1. Warsaw, September 27, 2007 World Bank EU8+2 Regular Economic Report Main Report

2. Main messages Growth continues despite recent international disturbances. Sustained efforts are needed to address on going challenges relating to CADs, inflation and fiscal consolidation.

3. GDP growth has been strong Slowed slightly in 2Q GDP growth rates (% yoy)

4. Consumption is strong in the Baltic States, Slovakia, and Romania, and is driven by strong wage growth. Investment is strong in Poland, Slovenia and Bulgaria. Consumption, Investment and GDP growth, yoy, %

5. Both residential and civil engineering. Especially strong in Baltics, Bulgaria and Romania. Increasingly important to overall growth. Now being constrained by labor shortages. Baltic real estate boom may be ending. Construction has been booming

6. External market conditions have changed significantly Global slowdown started in 2Q Shock from US mortgage and housing market developments. Global reprising of risk and retreat from risky assets. Represents a test of vulnerabilities of EU8+2 now more integrated into world economy. Potential further surprises and slowdown in US.

7. Two channels of communication of external shocks to EU8+2 Trade Financial markets

8. Geographical destination of exports of the EU8+2, structure in % EU8+2 exports to US are small US slow down would have to be much bigger and pull down RoW growth to have greater impact on EU8+2 via the trade channel

9. Financial vulnerabilities stem from need to finance CADs….. CAD as % of GDP

10. ….some of which are large and rising CAD as % of GDP

11. The type of finance matters FDI is the most secure and covers 100% of the CADs of Czech Republic and Poland, in 90% in Bulgaria and 2/3 in Slovakia and Romania. Hungary relies more on portfolio investment. Baltics rely on borrowing, largely through banks. In Latvia the rate of borrowing is unsustainable.

12. Evidence of trouble? Bond spreads Equity markets Currencies

13. Bond spreads up, but not much…

14. …and less in EU8+2 than in other emerging markets

15. Some stock markets are actually up Stock market indices in Visegrad countries, BG and ROBaltic countries and Slovenia

16. Currencies are mixed Exchange rates vs. Euro

17. EU8+2 have weathered this storm so far, but things could get worse There remains a large block of US mortgages to rollover. Further credit crunch could evolve despite Fed and ECB actions Sub-prime 60 day delinquencies by mortgage vintage year, adjustable rate mortgages, in percent of payments due

18. Fundamental medium term challenges remain Ensure that CADs do not grow unsustainably Ensure that inflationary forces remain controlled Continued efforts towards fiscal consolidation Address overheating in Latvia

19. Inflationary pressures are mounting Overall HICP

20. Some of the pressure is from volatile food and energy. But there are sustained pressures from wages which are growing faster than productivity in most countries. Overall HICP

21. Further efforts are needed towards fiscal consolidation Fiscal outcomes this year will be better than planned in most countries because of strong revenue performance. Hungary, Estonia, Poland, Slovakia and Latvia are making some consolidation efforts. Bulgaria and Romania could make greater consolidation efforts. Cyclically adjusted balances are high in Bulgaria and Estonia. Latvia is struggling to implement fiscal stabilization plan

22. Next year’s budget plans are not fully clear but indications are that many countries will cut tax rates and increase expenditures, especially social expenditures. There may be fiscal loosening in Estonia, Bulgaria and Poland. Fiscal 2008

23. Thank you for your attention http://www.worldbank.org/eca/eu10rer

24. From the Shortage of Jobs to the Shortage of Skills Recent Labor Market Developments in EU8+2 Countries World Bank EU8+2 Regular Economic Report Special Topic

25. Main questions What have been the main changes in the EU8+2 labor markets since the EU accession? What are the emerging challenges? How can they be addressed?

26. Main LM Developments in EU8+2 1. Substantial improvement in labor market conditions over a short period of time  A strong growth in domestic labor demand is the main factor behind the improvement 2. But labor resources are still underutilized  Low employment rates among certain groups  Long-term unemployment  Low-productivity employment 3. Still labor and skills shortages have emerged and may become an impediment to further growth 4. Challenge of mobilizing effective labor supply  Workers who have incentives to seek employment, and skills that enable them to take available jobs

27. Outline 1. Labor market conditions have improved 2. Labor remains underutlized 3. Skills shortages: an emerging challenge 4. How to mobilize labor supply to address skills shortages

28. Employment outcomes have improved

29. More people of working age are employed and less are unemployed Change in employment rates 2000-2006 (15-64)

30. thanks to a growth in labor demand Vacancy rates in EU8+2

31. Why labor demand picked up? EU accession and access to new markets Global economic prosperity But most importantly the responsiveness of employment to growth has significantly increased  All EU8+2 countries experienced periods of “jobless growth”  The increase in the “employment content” of growth reflects successful enterprise restructuring Move from “defensive” to “strategic” firm restructuring:  Initially firms were restructuring by shedding off redundant labor, and using productivity gains to meet increasing demand  Productivity growth has made EU8+2 firms more competitive  Which allowed them to expand and gain market shares  They need to hire additional workers to meet increasing demand and sustain growth

32. Other factors have played a negligible role Three main suspects: Labor market flexibility  No major reforms and no improvement =>  cannot explain the fall in unemployment Out-migration  It is not the hard core unemployed who migrate  Out-migration cannot account for job creation and employment growth  The fall in unemployment was associated with strong employment growth Active Labor Market Programs  Limited impact  Tend to redistribute jobs rather than create new ones  Cannot account for the increase in employment

33. Strict EPL has not hampered improvement in employment outcomes Rigidity of Employment Index

34. Labor remains underutlized

35. many people of working age do not contribute to output growth Youth  Hungary, Lithuania, Bulgaria Older workers  Poland, Slovakia, Hungary Long-term unemployed  Slovakia, Croatia, Romania Subsistence farmers  Romania, Bulgaria, Poland

36. Youth in EU8+2 do not combine education with work Share of 15-24 in part-time employment, 2006

37. Early retirement is a particular problem in aging societies Official and Actual (Median) Retirement Age in EU8+2, 2005 (Men)

38. As a result many older workers are out of the labor force

39. High shares of LTU point to structural unemployment Share of long-term unemployment in total unemployment, 2006

40. Many workers are employed in low- productivity agriculture Share of employment by sector, 2006

41. Skills shortages

42. Shortages of skilled labor have become employers main concern Percentage of firms that report worker skills as an important obstacle to firm operation and growth, 2005

43. Poland: hiring a worker with required skills is increasingly difficult Enterprises reporting hiring difficulties in an open survey on key obstacles to growth (in %) and the rank of this obstacle

44. Filling vacancy for a skilled worker can take a long time even if unemployment is high Time needed to fill a vacancy for a skilled worker 2005 (in weeks)

45. because of the skills mismatch: excess supply of low-skilled labor “Excess Supply” of Labor by Educational Attainment, 2006

46. Skill shortages have given rise to wage pressures and to growing ULC (Example: construction) Unit labor costs in construction, 4Q moving average, yoy %

47. How to mobilize labor supply?

48. The big shift Until recently low employment/population ratios in EU8+2 were due to insufficient labor demand Now they are they reflect supply side constraints There are labor shortages despite a large pool of working age population which out of the labor force but able to work The policy priority has shifted from fostering job creation to mobilizing effective labor supply Otherwise labor shortages may hinder economic growth

49. EU8+2 need to mobilize labor supply to sustain economic growth Three main ways of achieving this: Improving labor supply incentives through reforming social security systems Improving worker skills by making the educational system more responsive to labor market needs Opening labor markets to foreign workers to import labor with required skills

50. Thank you for your attention http://www.worldbank.org/eca/eu10rer