1 ESTONIA: 5 years in the EU Conference 30 April 2009 Estonian National Library, Tallinn 5 Years of an Enlarged EU * Filip Keereman (Head of unit ECFIN.G.3)

1

ESTONIA: 5 years in the EUConference

30 April 2009Estonian National Library, Tallinn

5 Years of an Enlarged EU*

Filip Keereman(Head of unit ECFIN.G.3)

*Prepared with the help of Rajko Vodovnik

2

• Economic Achievements– NMS– OMS– EU as a whole

• Growth drivers• Challenges Ahead • Interlinkages and Outlook • Economics Policies for Addressing

Challenges• Conclusion

Outline

3

Five years of an enlarged EU

• Workshop in November 2008, Economic Papers:

http://ec.europa.eu/economy_finance/publications/publ_list24809.htm

• Report on the ECFIN web site :http://ec.europa.eu/economy_finance/publications/publication_summary14081_en.htm

• Conference in Prague, March 2009

http://www.eu2009.cz/scripts/modules/diary/action.php?id=302

• Informal ECOFIN, 3-4 April, Council Conclusions 4-5 May

4

20

30

40

50

60

70

80

90

100

99 00 01 02 03 04 05 06 07 08 09 10

EU-15

SI

CY

MT

CZ

GDP per capita in PPS

HU

SKEE

PL

LT

LV

BG

RO

Forecast

Economic Achievements – NMS: Considerable catching-up and improved living standards

?

5

Estonia:• Income was 37% of OMS income in 1999; increased to

60% in 2007.

• Yearly average of exports of goods and services before enlargement, 99-03 :

EUR 5.2 bn; average yearly growth rate: 10.9% after enlargement, 04-08 :

EUR 10.0 bn; average yearly growth rate: 15.2%

• 50.000 new jobs have been created after the enlargement

• Unemployment rate:1998: 9.2%2008: 5.5%

6

New Member States have benefited from improved employment opportunities at home and abroadAt present juncture: concerns about return migrants replaced brain drain

Mobility rates by sending country, 2007 Workers’ remittances: not negligible in some countries

0 1 2 3 4 5 6 7 8 9

LTCYROPLSKBGLVPTEEIE

NLCZBEDKHUATELSE

UKDEFRFIIT

ES

% of working age popultion

4 years and less

More than 4 years

0 1 2 3 4 5

ROBGLUEE

LVLTBEPTPLCZSKSIESEL

MTFRNLFI

HUDKUK

IEDEIT

SE

% of GDP

7

Economic Achievements – OMS: Old Member States with strongest ties to new benefited most

FDI stocks in the new Member States and economic growth of selected old Member States

NLDK

IE

AT

UKIT

BE

EL

DE

PT

LU

FIFR

SEES

correlation: 0.40

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-10 0 10 20 30 40 50

Growth in trade (in % of total trade) of O MS countries with the NMS, 2002-2005

Cha

nge

in p

er c

apit

a G

DP

gro

wth

, 200

2-20

05IT

AT DEFR

LU

UK

FI

NL

IE

correlation: 0.33

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-50 0 50 100 150

Growth in FDI stocks (in % of GDP) in NMS held by selected O MS countries, 2002-2005

Cha

nge

in p

er c

apit

a G

DP

gr

owth

, 200

2-20

05

Trade with the new Member States and economic growth of the old Member States

8

Overall, smooth labour market developments

Recent intra and extra EU movers and the resident population

Citizenship

PL UK 59 IE 17 DE 11

RO ES 57 IT 26 UK 2

DE FR 33 AT 22 UK 18

UK FR 39 ES 20 IE 18

FR UK 35 DE 16 BE 16

PT ES 31 FR 28 UK 28

BG ES 56 DE 15 EL 7

SK UK 55 CZ 21 IE 11

IT ES 26 UK 23 FR 21

LT UK 52 IE 33 DE 10

Other UK 38 DE 17 FR 9

Total UK 32 ES 18 IE 10

Destination (% of citizenship total)

% of working age population

0 1 2 3 4 5 6 7 8 9

IECYLUES

UKATBESEFRIT

DKELPTDENLCZFI

HUSI

Old Member States

New Member Statesexcl. BG, ROBG, RO

Non-EU-27 citizens

Migration: UK top destination

9

New investment and export opportunities for old Member States, securing jobs and growth at home

• Increased trade growth of old Member States after the 2004 enlargement compared to the preceding five-year period

• The old Member States run a trade surplus with the new Member States

• Benefiting from complementarities: EU wide production networks are more competitive and increasing trade in intermediate goods

• Specialisation risk can be “insured” with trade in assets, specifically acquiring ownership of foreign enterprises

10

Economic Achievements – EU as a whole:

Has enlargement from 15 to 27 countries strengthened the EU?Opinions on enlargement

(EU-15 prior to May 2004, EU-25 and 27 afterwards)

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008

against

for

don't know

%

48% 44%

36% 40%

16% 16%

EU-27 O MS

Yes

No

Don't know

2008

11

Growth drivers:Institutional convergence

Unweighted average Standard deviation Unweighted average Standard deviation

Rank in Ease of Doing Business (World Bank)

2006 44.4 21.1 65.3 33.1

2009 42.8 16.3 68.3 35.3

Index of Economic Freedom (Heritage Foundation)

1999 60.6 7.9 64.5 6.3

2008 66.9 5.2 63.7 8.1

Corruption Perception Index (Transparency International)

1999 4.3 1.0 4.4 1.4

2007 5.0 0.9 4.4 1.4

New Member States Other developing economies

Note: Ease of Doing Business: the lower, the more favourable; adjusted for changes in the sample, so that data cannot only be compared between countries, but also through time; Index of Economic Freedom (between 0 and 100): the higher, the better; Corruption Perception Index (between 0 to 10): the higher, the lower corruption; "Other developing economies": 16 countries with an income level similar to that in the new Member States (Argentina, Botswana, Chile, Costa Rica, Croatia, Lebanon, Malaysia, Mauritius, Mexico, Oman, Panama, Palau, South Africa, Turkey, Uruguay and Venezuela) classified as "upper middle income by the World Bank.

12

New product market regulation (more competition, less state aid)

Total state aid

OMS EU-10 OMS EU-10Total aid, million € 34 000 5 654 44 000 3 200

% of GDP 0.4 1.4 0.4 0.5

2000-2003 2006

85 8173 72 72 69 69 68 67 67 67 67 66 66 65 65 65 64 63 63 62 61 60 60 59 58 58 54 53 51 50 44

911 23

1723

23 25 25 24 22 23 25 26 26 30 25 26 27 23 19

3429 30 31 33

27 32 3528 36 38

38

1 6 25

3 6 5 7 7 7 6 7 6 7 3 7 5 810

14

25 5 5 5

75 7

4

7 8

5

4 2 1 6 2 2 1 1 2 4 5 2 2 1 3 3 5 2 4 5 2 6 5 5 4 8 5 515

6 414

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MT

EL

SK RO

BG SI F

I

PL

NM

S

CY AT

EU

-10

CZ LT IT IE PT

DE

HU EE

ES

LU EA

EU

-27

LV

NL

OM

S SE BE

DK

UK FR

Increased Remained about the same Decreased Don't know/not available

Perceived development of competition

13

Increasing trade integration

Geographical destination of exports of new and old Member States

68.6 65.459.7 63.4 61.5 59.5

13.2 15.319.5

4.7 5.9 7.5

14.7 16.3 18.8

23.3 24.5 25.8

8.7 8.2 7.3

3.6 3.1 2.1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

99 04 07 99 04 07

NMS OMS

RoW

NMS

OMS

US

14

Geographical destination of exports of Estonia

% of total 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

EU-27 85.8 88.0 84.7 83.2 82.5 80.6 78.1 65.5 70.4 70.3

OMS 72.8 76.5 72.3 69.3 68.6 62.1 60.3 47.8 50.0 51.4Germany 8.5 8.5 7.2 10.1 9.9 8.3 6.1 5.0 5.2 5.1

NMS 13.0 11.6 12.4 13.9 14.1 18.6 17.9 17.7 20.4 19.0

Rest of the world 14.2 12.0 15.3 16.8 17.5 19.4 21.9 34.5 29.6 29.7CIS 5.8 3.9 4.7 5.5 6.1 7.8 8.7 10.5 11.5 13.5

Russia 3.4 2.4 2.9 3.4 3.9 5.6 6.5 7.9 8.9 10.5

China 0.1 0.2 0.5 0.6 0.7 0.6 0.5 2.8 0.8 0.6

Japan 0.3 0.2 1.0 0.4 0.4 0.3 0.3 0.6 0.5 0.5

USA 1.9 1.3 1.9 2.3 2.5 3.2 3.1 6.7 4.2 4.9

L. America 0.2 0.1 0.4 0.1 0.2 0.2 0.3 0.4 0.4 0.7

15

Trade balance of Estonia in 1999-2008

-30

-26

-22

-18

-14

-10

-6

-2

2

6

99 00 01 02 03 04 05 06 07 08

% of GDP

US

NMS

O MS w/o Germany

China

Japan

CIS w/o Russia

Row

Russia

Germany

16

Large degree of openness of NMS

Market integration in the new Member States

0

10

20

30

40

50

60

70

80

90

100

BG CZ EE CY LV LT HU MT PL RO SI SK NMS

99 04 08Average value of imports and exports of goods and services as % of GDP

O MS (08)

17

Rapid economic modernization, e.g. increased knowledge intensity

Exports of high technology products

0 5 10 15 20 25 30

WO RLD

O MS

NMS

SK

SI

RO

PL

HU

LT

LV

EE

CZ

BG 2006

1999

% of total exports

18

Export market shares of new and old Member States% World Old Member States New Member States Rest of the World

1999 2004 2007 1999 2004 2007 1999 2004 2007 1999 2004 2007

BG 0.07 0.10 0.13 0.10 0.16 0.20 0.14 0.24 0.35 0.04 0.06 0.07

CZ 0.47 0.76 0.88 0.87 1.45 1.70 3.18 3.76 4.22 0.10 0.16 0.21

EE 0.04 0.06 0.08 0.08 0.11 0.12 0.21 0.32 0.36 0.01 0.02 0.04

CY 0.01 0.01 0.01 0.01 0.02 0.02 0.01 0.01 0.01 0.00 0.01 0.00

LV 0.03 0.04 0.06 0.05 0.06 0.07 0.17 0.26 0.47 0.01 0.02 0.03

LT 0.05 0.10 0.12 0.07 0.13 0.14 0.38 0.60 0.76 0.02 0.06 0.07

HU 0.44 0.61 0.68 0.90 1.20 1.23 1.36 2.04 3.03 0.11 0.17 0.22

MT 0.03 0.03 0.02 0.05 0.04 0.03 0.01 0.02 0.01 0.03 0.02 0.02

PL 0.48 0.82 1.01 0.91 1.54 1.90 2.02 2.89 3.67 0.15 0.27 0.34

RO 0.15 0.26 0.29 0.26 0.47 0.50 0.43 0.65 0.94 0.07 0.11 0.13

SI 0.15 0.18 0.21 0.27 0.29 0.35 0.43 0.50 0.76 0.07 0.10 0.09

SK 0.18 0.30 0.42 0.29 0.50 0.73 2.02 2.22 2.71 0.03 0.07 0.09

NMS 2.10 3.28 3.90 3.83 5.97 6.98 10.35 13.50 17.29 0.64 1.05 1.30

OMS 39.49 37.84 34.33 66.67 64.87 61.10 68.95 59.77 58.30 21.08 20.43 18.24

EU-27 41.59 41.12 38.24 70.50 70.83 68.07 79.30 73.27 75.60 21.72 21.48 19.53

US 12.35 9.03 8.51 7.10 5.07 4.99 2.16 1.43 1.51 16.42 12.08 11.17

Japan 7.18 5.95 5.01 3.49 2.54 2.02 1.24 1.45 1.44 9.98 8.45 7.09

China 3.51 6.59 8.94 1.41 3.00 4.63 1.30 2.65 3.85 5.05 9.17 11.93

Brazil 0.88 1.10 1.30 0.56 0.65 0.82 0.30 0.38 0.29 1.13 1.44 1.67

Mexico 2.51 2.13 1.91 0.23 0.18 0.30 0.10 0.03 0.07 4.17 3.53 3.01Oth.L.Am. 2.19 2.18 2.79 0.92 0.84 1.19 0.28 0.32 0.41 3.15 3.17 3.94

19

Export market share after EU accession (extra-EU)

0

20

40

60

80

100

120

140

160

180

81 83 85 87 89 91 93 95 97 99 01 03 05 07

100 = level in first year of EU Membership

EL

PT

ES

LTEE

PL

LV

20

Strong investments inflows

0

1

2

3

4

5

6

7

99-03 04-06 99-03 04-06

O MS NMS

from the rest of theworld

from the O MS

% of GDP

Inward FDI in the new and old Member States

21

Inward FDI in the new Member States and Estonia according to its origin

0

5

10

15

20

03 04 05 06 07

NMS EE

Total FDIFDI from OMS

% of GDP

22

The ease of doing business and FDI in the EU Member States

AT

BEBG

CZ

DK

EE

FI

FR

DEEL

HU

IT

LV

LTNL

PL PT

RO

SK

SI ES

SE

UK

0

2

4

6

8

10

12

14

16

18

40 60 80 100Ease of doing business (0 lowest, 100 highest)

Ave

rage

FD

I in

200

5-20

06 (

% o

f G

DP

)

23

Cohesion policy implementation

Net EU transfers and GDP per capita in 2007 GDP effects of Cohesion & Structural Fund programmes

0

50

100

150

200

250

-1 0 1 2 3 4

Net EU transfers (% of GNI)

BGRO

EL

LTLV

EE

PL

HU

PT

SKMT

CY

ES

IE

LU

NL

DE

GNI per capita (PPS, EU27=100)

SI

0

1

2

3

4

5

07 08 09 10 11 12 13 14 15 16 17 18 19 20

% from baseline

Net-transfers received(% of GDP)

Real GDP

24

Challenges Ahead:Strong dependence of some NMS on foreign loansStrong vulnerability of some OMS vis-à-vis NMS

0

20

40

60

80

100

04 08 04 08 04 08 04 08 04 08 04 08 04 08 04 08 04 08 04 08

BG CZ EE HU LV LT PL RO SK SI

Vis-à-vis all sectors

Vis-à-vis the non-bank sector

2008 (all sectors):MT: 450%CY: 224%

% of GDP

0

20

40

60

04 07 08 04 07 08 04 07 08 04 07 08 04 07 08 04 07 08

AT BE DE FR IT SE

% of GDP

External loans of BIS reporting banks in 2004 and 2008 Claims of selected old Member States on new Member States, 2004-2008

25

Macro-financial vulnerabilities: Financial over-exuberance threatens catching-up achieved

0

5

10

15

20

25

BG CZ EE CY LV LT HU MT PL RO SI SK

% of GDP Current account deficit

0804

0

10

20

30

40

50

60

BG CY CZ EE HU LV LT PL RO SK

Credit growth

08

04

Annual % ch.

26

Interlinkages and Outlook Different sectoral links can be indentified

Central European Statesin %

Total output99-03 2.92 5.91 1.48 3.0504-08 3.81 8.90 2.13 5.35

Agriculture99-03 0.04 0.09 0.00 0.0804-08 0.09 0.06 0.02 0.15

Industry (including construction)99-03 1.33 1.82 0.23 0.8104-08 1.61 2.54 1.03 2.59

Market services (including financial intermediation)99-03 1.25 3.34 0.98 1.6104-08 1.88 5.31 0.95 2.28

Public services99-03 0.30 0.55 0.25 0.4904-08 0.24 0.83 0.11 0.21

CZ, HU, PL, SK

Nordic States

FI, SE EE, LT, LV AT, DE

Sectoral contribution to growth in selected regions

27

Increased business cycle synchronisation between new and old Member States aggregate

95-08 95-01 02-08BG 0.49 0.53 0.64CY 0.80 0.78 0.85CZ 0.23 0.16 0.60EE 0.14 -0.10 0.72HU 0.38 0.42 0.34LT -0.29 -0.41 0.08LV 0.59 0.40 0.86MT na na 0.52PL 0.47 0.55 0.34SI 0.59 0.39 0.86SK -0.36 -0.45 -0.16NMS 0.30 0.23 0.51OMS 0.77 0.76 0.81

28

Strong correlation also in high frequency data

Monthly Production Index yoy change Industrial Confidence Indicator, monthly

-15

-10

-5

0

5

10

15

04 05 06 07 08

O MS

NMS

-40

-30

-20

-10

0

10

04 05 06 07 08 09

O MS

NMS

29

…but there are country difference

Monthly Production Index yoy change Industrial Confidence Indicator, monthly

-25

-15

-5

5

15

25

04 05 06 07 08

BG CY CZ EE HU LVLT PL RO SK SI

-40

-30

-20

-10

0

10

20

30

04 05 06 07 08 09

BG CY CZ EE HU LVLT MT PLRO SK SI

30

Structural differences in production structureOutput composition in nominal terms

Latest PL data from 2005, LV+LT from 2006

% of gross value added 1999 2003 2007OMS Manufacturing 19.5 17.6 16.8

of which Food, textile 3.4 3.0 2.5Chemicals, non-metalic 3.8 3.5 3.3Transport, metal equipment 9.1 8.1 8.1

CZ Manufacturing 26.6 24.7 27.4of which Food, textile 5.6 4.6 3.6

Chemicals, non-metalic 4.8 4.8 5.1Transport, metal equipment 12.5 11.9 15.1

HU Manufacturing 23.5 22.0 21.9of which Food, textile 5.0 4.3 2.9

Chemicals, non-metalic 3.9 4.1 4.2Transport, metal equipment 10.3 10.6 11.7

PL Manufacturing 19.0 17.7 18.9of which Food, textile 4.1 4.3

Chemicals, non-metalic 3.7 3.7Transport, metal equipment 6.4 6.8

SK Manufacturing 24.4 23.4 24.7of which Food, textile 6.1 4.0 3.1

Chemicals, non-metalic 4.4 3.7 3.5Transport, metal equipment 9.6 11.4 12.4

LV+LT Manufacturing 16.4 17.0 15.7of which Food, textile 7.1 5.8 4.7

Chemicals, non-metalic 1.9 2.2 2.9Transport, metal equipment 3.0 3.4 3.5

31

Q on Q GDP growth and industrial confidence indicator, 2008

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Q 1 Q 2 Q 3 Q 4 Q 1-40

-30

-20

-10

0

10

20Czech republicGDP

Industrial confidence indicator (rhs)

%

-5.0

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0Q 1 Q 2 Q 3 Q 4 Q 1

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

Estonia

% -6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Q 1 Q 2 Q 3 Q 4 Q 1-40

-35

-30

-25

-20

-15

-10

-5

0

Latvia

%

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

Q 1 Q 2 Q 3 Q 4 Q 1-40

-35

-30

-25

-20

-15

-10

-5

0

5

10Lithuania%

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Q 1 Q 2 Q 3 Q 4 Q 1-40

-35

-30

-25

-20

-15

-10

-5

0Hungary%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Q 1 Q 2 Q 3 Q 4 Q 1-30

-25

-20

-15

-10

-5

0Poland%

-3.0

-2.0

-1.0

0.0

1.0

2.0

Q 1 Q 2 Q 3 Q 4 Q 1-20

-15

-10

-5

0

5Romania%

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Q 1 Q 2 Q 3 Q 4 Q 1-40

-35

-30

-25

-20

-15

-10

-5

0

5

10Denmark%

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Q 1 Q 2 Q 3 Q 4 Q 1-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5Germany%

32

20

30

40

50

60

70

80

90

100

99 00 01 02 03 04 05 06 07 08 09 10

EU-15

SI

CY

MT

CZ

GDP per capita in PPS

HU

SKEE

PL

LT

LV

BG

RO

Forecast

A halt in the catching-up is forecast: will it be temporary ?

33

Policies to Address Challenges

• Fiscal policy and SGP• Lisbon Strategy• Enhanced country surveillance• EU cohesion policies • EU financial institutions: European

Investment Bank, European Bank for Reconstruction and Development

• Balance-of-Payments Facility

Policy advise

Financial support

34

EU cohesion policies

0

20

40

60

80

100

TO

TA

L

ESF

, ER

DF

,C

F

EA

FR

D

EF

F

EA

GF

Pop

ulat

ion

GD

P

NMS O MS

% of total

Regional distribution of EU transfers, 2007-2013

Note: EAGF : preallocated direct payments only, excluding market expenditure

•Estonia: Fin. Perspectives 08-13: 4.9% of GDP on average per year (EUR 0.8 bn, 2008 prices); in net terms 3.9% of GDP (after contribution to EU budget)2007: 2% of GDP (EUR 0.3bn, 2008 prices) in net terms

35

EU financial institutions: EIB and EBRD step up lending in framework in of EERPEuropean Investment Bank

• EIB: + EUR 15 bn per year in 2009-10 up to almost EUR 70 bn per year in EU, pre-accession and neigbourhood

• Of which about EUR 12 bn in NMS per year (increase by EUR 2.5 bn per year)

• Focus on SME (via commercial banks) up to EUR 7.5 bn per year (+ 50%)

• Focus on energy, climate change, infrastructure

36

European Bank for Reconstruction and Development

• Increased lending capacity by 20% to EUR 7 bn 2009

• Target financial sector in emerging Europa (and Asia)

• Special attention for trade: Trade Facilitation Programme (+ 1.5 bn to guarantee to traded

“Vienna Initiative” (February 2009): EIB, EBRD, World Bank Group

• EUR 24.5 bn for Eastern Europe in 2009-10• Co-ordinated financial assistance (equity,

debt finance, credit lines) via banks to support lending in particular SME

37

EU balance of payments assistance

Context (contribution to multilateral effort)

• EU: facility increased from EUR 12 in 1988 when the instrument was created to EUR 25 bn in December 2008 and to EUR 50 bn (Commission proposal, April 2009 – Council adoption, May 2009)

• Programme based (about 2 years); disbursement in several instalments on respect of conditionality

• EU uses its AAA rating to borrow in the market and on-lends to Member State without costs

• Loan to be reimbursed in about 5 years

Hungary: 4 November 2008 Council Decision

• EUR 6.5 bn, in total EUR 20 bn (12.5 from IMF; 1.0 from WB)

• First instalment: EUR 2 bn (December 2008)

• Programme adapted in light of worse economic situation

• Second instalment: EUR 2 bn (March 2008)

38

Latvia: 20 January 2009 Council Decision• EUR 3.1 bn, in total EUR 7.5 bn (1.7 from

IMF; 0.4 from WB; 1.9 from SE, DK, NO, EE; 0.4 from EBRD, PL, CZ)

• First instalment: EUR 1 bn (February 2008)• Programme adapted in light of worse

economic situationRomania: 21 April 2009 Commission

proposal• EUR 5 bn, in total EUR 20 (13 from IMF, 1.0

from WB, 1.0 from EIB, EBRD)• Council adoption planned for 5 May 2009

39

Conclusion

• Enlargement has been a great success for all Member States.

• However, the achievements cannot be taken for granted: further reforms are essential to maintain them and ensure continued integration and income convergence in the EU.

• The current crisis may not only pose challenges but also offer opportunities for implementing deep growth-enhancing reforms.