1. The impacts of the economic crisis on Central-Eastern Europe PERC conference Brussels 26 March 2010 Béla Galgóczi ETUI bgalgoczi@etui.org

2. 2 Main framework conditions – March 2010 ● Clear signs of an end of the recession and a moderate upturn in developed industrial economies (EU, US, Japan) but it is volatile and still mostly due to on-off crisis intervention measures ● The labour market situation is further on tense, unemployment is still growing, wages are under pressure ● At the same time stock markets are soaring due to abundance of liquidity (banks put their `easy money` into the stock market instead of the real economy – a new asset bubble is being blown) ● This has however a positive side effect on CEE – more risk taking means stabile markets, strengthening exchange rates, low risk premia and growing raw material prices ● Latvian risk premia (e.g CDS spreads) are lower than those of Greece

3. 3 Main framework conditions – March 2010 ● The big fear is about debt levels accumulated through the stimulus packages – what exit strategy? ● The Greek crisis has again put the debt issue in focus ● Even if no immediate impact on CEE, the risk is there (especially if the GR crisis escalates) ● On the other hand CEE economies also perform better now, but the social price is enormously high ● Even if Latvia and Hungary are seen as good examples for quick fiscal consolidation – it is clear that the therapy was harsher than necessary and the social price is huge (especially in Latvia – see later) ● Where is Europe in this situation ? – the way it tackles the GR crisis does not mean anything good for CEE! ● Many say now: GR has better chances with the IMF as it is softer than the EU

4. 4 Main macroeconomic trends in Europe at light of available data ● GDP in 2009 - ● a lost decade for many countries – ● Growth scenarios – back to trend growth or the `scar of the crisis` remains for long term (important for job prospects!) ● GDP/employment/unemployment – huge differences among countries – lessons for labour market policy ● The fiscal situation (alarming for many countries - with a prospect of prolonged recession)

5. 5 Change in output, 2008Q1 to 2009Q2 Data source: Eurostat. %

6. 6 A lost decade? When Was Current GDP first achieved Source: Euostat Quarterly National Accounts. Notes: This Graph shows when the current level of seasonally adjusted real GDP per capita was first achieved. Current Period taken as Q2 2009, except Poland (Q1 2009) and Italy (Q3 2008) Data unavailable for AT, CY, FR, RO, GR and BG

7. 7 Potential output and growth scenarios after the crisis output time output time output time trend rate of output growthactual path of output one-off output loss growing output losses

8. 8 GDP, employment and unemployment rates, 2009Q2 (change compared to 2008Q2) Source: Eurostat (2009) European Labour Force Survey and National Accounts. Age: 16-64. Note: incomplete data for BG.

9. 9 Change in output and employment, 2008Q2-2009Q2 Data source: Eurostat.

10. 10 Government budget deficit/surplus (% GDP) Data source: AMECO (2009 estimate, 2010 forecast).

11. 11 Baltic states in focus ● The Baltic states were hit hardest by the crisis ● A 20% GDP drop is dramatic and involves substantial sacrifice from the population (as a result of unsustainable growth strategies in past) ● Crisis management focused on short term results and not on a future perspective ● No socially just distribution of the burdens ● Severe conditions for fiscal tightening – to cut public spending: Latvia 20% cut of public sector wages, 10% cut of pensions, social welfare schemes)

12. 12 Baltic states in focus ● At the same time, Latvia was anyway the second poorest EU country and had the lowest level of social spending ● Its GDP is back on the level of 1990! ● Unemployment over 20% - highest in EU ● Wage cuts among highest in EU ● Working poor among highest in EU ● Labour market spending among lowest in EU (under 0.5% of GDP)

13. 13 Latvia’s GDP in prices of 2000 in % to the level in 1990

14. 14 Economic downturn and increase in unemployment rates. Harmonized unemployment rates in selected EU countries, 2008-2009 (in %) Source: Own elaboration based on EUROSTAT data

15. 15 Year on Year Percentage Real Change in Wages and Salaries (Q2 2008 to Q2 2009) Source: Eurostat Labour Cost Index and Harmonized Index of Consumer Prices. Note: Seasonally adjusted change in real wages and salaries,2008Q2 to 2009Q2, except Netherlands, Luxembourg and Italy 2008Q1 to 2009Q1. (NACE rev2 sectors B-N). Data unavailable for IE, SE and FI

16. 16 In work at risk of poverty – single parents Data Source: Eurostat Survey of Income and Living Conditions. Notes: 2008 Figures except IE, IT, UK, and EU27

17. 17 Active and passive expenditure on labour market policies and unemployment rates, 2007 Source: Eurostat (2009) Labour Market Policy. Note: information for Greece is missing. expenditure in % of GDP

18. 18 Where was Europe in this situation? – no visible strategy ● Europe was paralysed in regard to CEE NMS and EU neighbourhood countries, as well ● Europe in lack of proper institutions and resources to cope with a crisis of this magnitude ● Refusal of a crisis intervention fund for CEE countries was a negative message from the EU to CEE NMS and to the whole Eastern Europe (beyond the EU)

19. 19 The role of the IFI-s in the region EU – IMF While Europe sets on a wide range of public resources to offset the effect of the crisis (stimulus packages, labour market schemes, more government deficit), countries in CEE in the deepest crisis need to apply brutal fiscal tightening Europe and the world seem to abandon neo-liberal economic doctrine, but this is being applied in CEE as crisis management receipee: cut spending at any price > t his makes the downturn even more severe Even so, it is true that the IMF showed certain flexibility

20. 20 Conclusions ● European response: not satisfactory and not properly co- ordinated ● The leading role in the region left to the IMF ● The current situation perfectly illustrates the adverse effects of an economic integration without social and political integration in the EU ● This is also a bad message to EU accession countries and countries with a future prospect of EU membership ● Weak social welfare systems in the CEE region are being further dismantled. Perversely the failed neo-liberal economic doctrine seems to be further strengthened in the new member states, while developed Western economies seem to leave it behind.

21. 21 Conclusions ● With the acute financial turbulences (e.g. exchange rates, capital extraction) over now /really over??/, ● Emphasis must be given to the employment impacts ● Here the worse is still to come and employees in most CEE /in SEE countries even more so/ are unprotected ● More fiscal room and effective labour market policy is needed ● Decisive would be however the upturn in Western Europe as this boosts CEE exports