NEW EU MEMBERS OF CENTRAL AND EASTERN EUROPE Impacts of EU Membership on New Members Tibor Palánkai Emeritus Professor Corvinus University of Budapest.

NEW EU MEMBERS OF CENTRAL AND EASTERN EUROPE

Impacts of EU Membership on New Members

Tibor Palánkai

Emeritus Professor

Corvinus University of Budapest

2011. Spring

Prof. Palánkai Tibor

Integration Maturity – Framework of Analysis

Accession maturity (meeting certain pre-set and concretely defined criteria as condition of entry into the organisation),

Membership maturity (concrete criteria for members inside organisation) and

Integration maturity.

Copenhagen Criteria 1993

1. Stability of institutions, guaranteeing democracy (rule of law, human rights, respect for and protection of minorities);

2. A functioning market economy;3. Capacity to cope with competitive pressure and market

forces within the Union;4. Ability to take on the obligations of membership,

including adherence to the aims of political, economic and monetary union;

5. The Union’s capacity to absorb new members.

Main Dimensions

Integration maturity analyzed: in three main dimensions:

• Economic maturity, • Political (social) maturity and • Institutional maturity.

Integration maturity analysed only in economic terms.

Political and institutional maturities mix up with accession or membership procedures.

Political Maturity

Rome Treaty (1957): – State of democracy,

Copenhagen (1993): Stability of institutions, guaranteeing democracy

Madrid (1995): Functioning institutions

Economic maturity

Main elements of economic integration maturity:

• Market economy (“functioning”); • Competitiveness (structural patterns); • Macro-stability and stabilization; • Convergence (real or financial); • Financing or financeability;

Marketisation Completed

By the end of 1990s, the basic structures and institutions of marketisation created, most of the CEcs are not less marketised, than countries with a similar level of development (NICs, Latin‑American or even South European countries). Others followed later.

The market structures have been consolidated and expanded (number of banks, companies on stock exchange, expansion of financial services, improvement of market infrastructures, high number of bank cards or computerized bank transfers etc.)

Deficiencies of Marketisation

• Modern market infrastructures still have to be further developed,

• Further modernization of the banking sector, • Reform of the public services sphere and finances, • Suppression of the black or grey economy, • Competition policies should be up graded, • Elimination of chain debt, which is undermining

stability.

Impacts of Associations

They made possible rapidly to reorient their trade towards EU as main partner.

In 1989, about 25-30% of trade of Candidates was with EC, by 1993 this share was 50%, and by 2002, it increased in New Member’s export to 67%, and in their import to 64%.

The trade integration reached the high level, characteristic to the EU member countries.

Trade integration of CEE was the major factor in the rapid export-led growth and from 2000s real economic convergence (1,5-2% growth “surplus) of the CEE region.

Development of EU integration processes

Some indicators of integration in the EU:

Share of intra EU export to GDP: 1960: 7,7%; 1970: 10%; 1980: 13%; 1990: 14%; 2000: 22%; 2007: 24%.

Share of intra-export in total export:1960: 30%; 1972: 50%; 1985: 55%, EU15: 1992: 62%, 2004: 65%, 2007: 60%.

Enlargement and Integration

Share of intra EU 25 export to total: 1999: 68.1%; 2004: 66.4%; 2007: 67%.

Share of EU15 in the new members export:1990: 25-30%; 1999: 68.6%; 2004: 65.4%; 2008: 59.7%.

Share of NMS of in NMS total export:1999: 13.2%; 2004: 15.35, 2007: 19.5%.

Share of RoW in NMS export:1999: 18.3%; 2004: 19.4%; 2007: 20,9%.

Competitiveness

Every market integration raises the question of development differences: levels of costs and competitiveness.

Competitiveness is a complex indicator, can be defined in both micro- and macro-economic contexts. Countries compete not only with their techno-economic structures (technologies, products, innovations, company managements etc.), but also with their socio-economic and institutional systems.

The relationship between balance of payments and the exchange rate and competitiveness.

Complex definition of competitiveness

On micro-level. On macro level:

On each:• Technical and structural factors,• Macro-performances,• Infrastructures,• Institutional and political (economic policy) factors,• Subjective factors.

Competitiveness

On micro-level:

• Cost level and quality of products;• Level of productivity of the given sector or products;• Innovation, introduction of new technologies and

products;• Forms of comparative cost advantages.• Efficiency of management and marketing;• Subjective factors.

Competitiveness

Some important macro-parameters:• Levels of development, productivity,• R&D expenditures (level, growth, relation to

GDP and per capita),• Position of high-tech sectors,• Exchange rate stability,• State and development of factor market,• State of human capital and infrastructure.

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State of Competitiveness of CEE

Comparative wage cost advantages. The Hungarian productivity is 58% of the EU average, while the wages are only 40% of it. (2002). Productivity as output per worker employed in manufacturing rose between 1991 and 2000 2.2 times. Real wages rose only 30%.

Relatively good quality and low cost of their human capital, labour is under-priced.

Average productivity of New Members amounts to about 2/5 (40%) of old EU, average monthly wages in manufacturing in the old EU are 5-10 times higher.

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Productivity per Employed

PPP calculated GDP 1997 2007 EU27 100 100 Finland 112 113 Germany 112 107France 109 100 Hungary 62 76Slovenia 72 87Slovakia 55 76 Czech Republic 61 73 Portugal 69 68 Poland 50 62

Eurostat 1997- 2008

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Knowledge Intensity

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

Export of Hi-tech products

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EU15 12,1

Sweden 34,5

Denmark 27,6

France 7,6

Germany 8,2

Hungary 4,2

Czech Republic 5,9

UK 29,1

Portugal 4,6

Spain 12,1

European Innovation Scoreboard 2007

Participation in Life-long Learning in Percent of 25-64 old

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EU25 10,6

EU15 12,0

USA 14,9

Japan 16,3

Netherlands 22,4

Denmark 22,0

France 13,9

Hungary 4,5

Czech Republic 4,3

Portugal 10,1

Poland 1,9

European Innovation Scoreboard 2007

Access to High Speed Internetper 100 population

State of Competitiveness of CEE

CEE are still far away of the knowledge-based society. In Hungary R&D fell from 2% to 0.5% in early 1990s. Since recovery it is on 1% level, but still far behind of 2% of EU.

Some multinationals set up research bases in CE (Nokia in Hungary).

Behind in use of Internet, relatively high communication costs (in Hungary about 25-30% above EU average), relative lagging behind in infrastructure, high costs of local capital.

Enlargement and Competitiveness

With full membership new competitive conditions: • Liberalization extended to agriculture, contradictory

results. • By entering single market, ‘asymmetry’ in non-tariff,

informal trade barriers disappear. • In single market, new members will be able to use

their cost advantages in service sectors (health, technical design, education, etc., but “Polish plumber”)

• Greater budget transfers for compensations.Opening to global markets (CET lower than national tariffs)Union’s competitiveness on global markets may improve.

  Macro-economic stabilization

Economic stability is an important factor of integration

maturity (from the point of view of the normal functioning of the market, and of the ability to exploit the advantages of any market integration).

Macro-economic stability and integration are mutually dependent, while it is one of the preconditions of successful integration, it is also an indicator of the success of that integration. (Interrelations between rapid economic growth and success of integration.)

Stability and stabilisation

The performance of the EC countries as a benchmark. • Compare performance to the average of the present EU

economies. • Take the best-performing EU countries.• Comparisons of countries of more or less similar levels

of development. • Maastricht criteria combined with the Stability Pact

(about 2% inflation, a 0-3% budget deficit and less than 60% debt in terms of GDP).

Economic Performance in Historical Perspectives

CEEcs had relatively rapid growth during 1950s and 1960s, which supported illusions about wining “peaceful competition”. SU in early 1960s set an objective overtaking the US by 1980.

Due to world economic crisis, gradual deterioration of the performance of centrally-planned economies from early 1970s, which culminated by the end of the 1980s, and lead to collapse of the Soviet system in CEE.

Failure to adapt to new challenges, particularly that of globalisation.

Hungary in Stop-go Cycle

GDP Annual growth in 1950-59 1960-69 1970-79 1980-88 3,8 3,1 2,3 1,1Hungarian economy in a “stop-go” cycle, from early 1970s

to 1988.It meant deterioration of budget and balance of payments

during rapid growth,Stagnation of economy due to the necessary restrictions.Economic growth was around 1-2%.When growth above 3% (1987 and 1994) indebtedness just

doubled in one year.Growth was unsustainable.

Hungarian Economic Performance

GDP Growth Inflation Budget Unemployment

% % deficit % % 1989 -0,2 17.0 - 0,61990-93 -5,5 (-20) 27,2 5,6 12,3 (1992) 1994-99 3,3 18,7 5,1 7,0 (1999) 2000-05 4,1 6,5 5,7 5,9 (2003) 2006 3,9 6,5 9,2 7,5 2007 2,4 6,5 6,2 7,62008 0,6 6,1 3,4 7,82009 -6,3 4,2 3,9 9,82010 1,2 4,9 3,7 11,2

„Transformation Recession”

Transformation accompanied by a so-called “transformation recession” at the beginning.

Term introduced by János Kornai, and the process culminated in 1991-93.

Recession was unprecedented, similar fall in production happened only during the “Great Depression” of 1929-33, but was not repeated after the war.

Accompanied by hyper-inflation and sudden increase of unemployment.

„Transformation Recession”

Hungary between 1988 and 1993 lost 20% of (in 1929-33 only 10%),

Former full employment turned to 12% unemployment (1992),

In 1991 inflation peaked at 38%.

The depth of the 1990s crisis differed greatly from one country to another, and so did the subsequent recovery, which started in 1993-1994.

„Transformation recession”

Decline of GDP:

Country Transformation crisis (in the period 1989-93)

as %Slovakia about 20% Hungary about 20%Poland about 20%Slovenia about 20%Croatia about 25%Czech Republic about 20%

„Transformation recession”

Decline of GDP 1989-1993:

Latvia above 50% Lithuania above 50% Estonia about 35% Romania about 40% Bulgaria about 45%

Eurostat.

„Postponed-Transformation Crisis”

Fall in GDP:

Czech Republic 1997-99 4%

Lithuania 1999 4%

Estonia 1999 1%

Romania 1997-99 13%

Bulgaria 1996-97 17%

Due to slow and delayed restructuring of economies, hesitant, postponed privatisation (commercial banks) in Romania and Bulgaria, Czech Republic. In Baltics, Russian crisis caused a mini-recession.

Recovery and Catching up

Growth of GDP after 1994-95 accelerating:

Annual growth Annual growth

1996-2000 2001-2005

Czech Republic 1,5 3,6

Slovakia 3,8 4,6

Poland 5,4 2,9

Hungary 4,0 4,2

Croatia 3,4 4,7

Recovery and Catching up

Growth of GDP after 1994-95 accelerating: Annual growth Annual growth 1996-2000 2001-2005Bulgaria -0,8 4,9Romania -1,3 5,7Estonia 6,1 8,3Latvia 5,7 8,1Lithuania 4,2 7,6

Growth rates indicate that global recession in early 2000 left CEE unaffected.

Recovery and Catching up

Growth of GDP between 1989 and 2005:

Level of 2005 in percentage of 1989

(1989=100)

Czech Republic 120,7

Slovakia 141,7

Poland 148,3

Hungary 127,8

Croatia 100,1

Slovenia 135,4

Recovery and Catching up

Growth of GDP between 1989 and 2005: Level of 2005 in percentage of 1989

(1989=100)

Bulgaria 93,8Romania 104,8Estonia 127,9 Latvia 106,4Lithuania 99,2

Summary of Stabilisation

CEE countries have produced diverging performance in stabilization of their economies.

CE countries returned to pre-transformation level by end of 1990s.

Others (Bulgaria, Croatia, Romania) followed later, Baltic countries had to cope with Soviet inheritances.

Unemployment meant a high social cost of transformation. By entering EU in 2004, all countries completed

stabilization of their economies, and they got close to meet Maastricht criteria. 

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Growth Patterns after 2004

• Rapid growth in NMS after 2004, with around 6-7% annual increase of GDP.

• In Baltics, Romania and Slovakia growth was close or above 10% (certain overheating). Hungary growth fell from the 4% to 1% after 2006, due to restrictions.

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Growth Impacts of Enlargement

Unprecedented and robust dynamic impacts:• Accession process boosted economic growth in

the new Member States by about 1¾ percentage points per year over 2000-08, when growth increased from 3½%, on average, in 1999-2003 to 5½% in 2004-08.

• Growth in the old Member States also benefited from enlargement (adding up to a cumulative increase in output of around ½% over the same period).

Impacts of Global Crisis

Growth of GDP in 2005-2010: Annual growth 2005 2006 2007 2008 2009 2010Czech Republic 6,0 6,0 6,1 2,5 -3,9 1,8Slovakia 6,0 6,2 10,6 6,2 -5,0 3,9 Poland 3,2 5,8 6,8 4,9 1,7 3,8Hungary 4,1 3,9 0,9 0,7 -7,7 1,2Slovenia - - 6,8 3,5 -7,8 1,2EU 15 0,8 2,5 2,0 3,1 -3,7 1,8EU 10 - - 7,0 4,3 -8,3 2,5EU 27 1,9

Impacts of Global Crisis

Growth of GDP in 2005 and 2010: Annual growth 2005 2006 2007 2008 2009 2010Bulgaria 5,5 6,5 6,2 6.0 -5.2 0,1Romania 4,1 8,0 6,2 7,1 -7,0 2,5 Estonia 9,8 11,5 6,3 -3,5 -15,5 1,3

Latvia 10,2 12,0 10,0 -4,6 -17,0 -0,9Lithuania 7,4 8,1 8,9 2,8 -16,0 0,9 Croatia 4,3 4,8 5,5 2,4 -6,0 -1,5 Remarkably high growth produced till 2007, but dramatic

fall in 2009 and slow recovery in 2010, except Romania.

From Stabilization to Present Crisis

1. Most of the countries suffered from stagnation of their economies from the 1970s, negative growth from the second half of the 1980s.

2. CEs were “only moderately” hit by the transformation recession, and they turned to recovery after 1993-4. Some others hit by a postponed-transformation crisis in late 1990s).

3. CE caught up by end of 1990s to 1989 levels, others followed with some delay.

From Stabilization to Present Crisis

World economic slow down of 2001-2002 has not been felt in CEE (in some countries only by moderate slow down of growth). High growth in 2005-2007.

Most of the NMs greatly affected by financial crisis after 2008, most of the economies slowed down, and negative growth in 2009, except Poland. still modest recovery in 2010.

Convergence broken after 2008.

  Unemployment in CEE

As percentage of labour forceCountry Peak year Highest Level

(1990-2007) 2007 2009 2010Czech Republic2005 8,9 6,6 8,1 8,7 Hungary 1992 11,9 7,3* 9,9 11,2Slovenia 1992 11,5 4,9 5,8 7,0Slovakia 2001 19,0 11,0 11,8 14,5Poland 2002 19.0 11,2 10,9 12,1EU15 1994 11,1 7.5*Lowest was in 2001 - 5,7%.

  Unemployment in CEE

As percentage of labour forceCountry Peak year Highest Level

(1990-2007) 2007 2009 2010Bulgaria 1993 21,4 6,9 9.3 9,1Romania 1993 10,4 4,3 6,3 7,6 Estonia 2000 12,8 4,7 13,7 18,2 Lithuania 1995 17.1 4,3 13,5 17,3 Latvia 1995 18,9 6,0 17,1 15,1

EU 15 1994 11,1 8.9 9,9

Unemployment in CEE

Unemployment was a relatively new phenomenon in the region. Before 1989 unknown in CEE, except Yu.

One of the costs of transformation crisis, unemployment increased in all these countries.

In many countries unemployment peaked nearly 20%. Only Czech Republic, Hungary, Slovenia and Romania remained bellow comparable EU averages.

Poland as the largest (Slovakia and Croatia) had to cope with high (15-18%) unemployment till early 2000s.

High unemployment was one of the constraints of enlargement.

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Employment impacts of Enlargement

• As a result of corporate restructuring, the contribution of labour was negative in 1999-2003.

• Since 2004, robust growth in employment of about 1½% annually in the new Member States went alongside

• Strong employment creation in the old Member States (about 1% per year since enlargement).

• Contradicting assumptions on „Dislocation”

Unemployment and Crisis

In all countries unemployment increased substantially in 2009, and the process continued in 2010.

Dramatic increase in Baltic countries, in spite of modest recovery.

Only Czech republic, Slovenia, Bulgaria and Romania remained bellow of EU15 level.

Inflation performances

Country Peak year inflation Inflation

2007 2009 2010 Czech Republic 1991 (58) 2,8 1,0 2,1Slovak 1991 (58) 2,8 1,6 1,0 Hungary 1991 (35) 7,5 4,2 4,9

“Hyper-inflation” (three-digit or more)

“Moderate inflation” (12-18%)

“Desirable inflation” (2-3.5%)

Above three countries avoid hyper-inflation.

Hyper-inflation countries

Country Periods Peak year 2007 2009 2010

Poland 1989-90 1990 (586) 2,5 3,5 2,6Slovenia 1989-92 1989 (550) 3,6 1,0 1,9Romania1990-94 (-97) 1993 (256) 4,8 5,6 6,5 Bulgaria 1991(-97) 1997 (1061) 8,4 2,8 9,1Estonia 1991-92 1992 (1076) 6,6 -0,1 2,2Latvia 1991-93 1992 (954) 10,1 3,7 -1,4Lithuania 1991-93 1992 (414) 5,7 5,4 1,0Croatia 1989-93 1993 (1517) 2,9 2,5 1,0

Evaluation of inflation performance

• Inflation did not exist in most of CEE, except the reform countries (Yugoslavia, Poland and Hungary).

• Most of the countries, during the transformation crisis had to cope with hyper-inflation. Hyper-inflation was avoided by Czech Republic, Hungary and Slovakia.

• Hyper-inflation re-emerged later in slowly transforming and stabilizing countries in 1997 (Bulgaria and Romania).

• Bulgaria was successfully dealing with inflation with the help of currency board.

Evaluation of inflation performance

• The Phillips curve seems to be validated for the Baltics (and Bulgaria), where low inflation was achieved at the expense of high unemployment. Hungary and Slovenia is an opposite case for structural reasons..

• By 2002-2003, most of the countries brought down their inflation to a desirable level, and meeting requirement for joining the Euro-zone (around 2-3%). The exceptions were: Romania, Slovakia, Slovenia and Hungary.

Evaluation of inflation performance

• After 2003, in most of the countries inflation increased again (due to high growth).

• After 2008 recession had deflationary affects with question marks for the future.

• In 2010, practically only Romania (6,1%) and Hungary (3,7%) were above the Euro-zone average (2,2%)

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Varying budget deficits

The NMCs, when joining in 2004, met the 3% requirement, except Hungary (6,4%), Poland (5,4%) and Cyprus (4,1%).

By 2009 (2010) considerable deterioration:

Some countries produced above 10% (Greece, UK, Spain, and Ireland) or around 6-7% deficit in GDP (Cyprus, and France)

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Varying budget deficits

In 2010, the budget deficit in GDP was around 7-8% in Slovakia, Poland, Romania, Slovenia (6,3%), Latvia and Lithuania;

It was bellow 3% only in Estonia (1,4%), which helped to join the Euro-zone in 2011.

The deficit was close to 4% in Czech Republic (4,5%) and Bulgaria (4,3%).

Hungary's deficit peaked at 9.2% of GDP in 2006, but after improvement (2010 - 3,7%).

Summary evaluation

CEE countries have produced diverging performance in stabilization of their economies.

CE countries returned to pre-transformation level by end of 1990s.

Others (Bulgaria, Croatia, Romania) followed later, Baltic countries had to cope with Soviet inheritances.

Unemployment meant a high social cost of transformation.

Summary evaluation

By entering EU in 2004, all countries completed stabilization of their economies, and they rapidly converged and many got close to meet Maastricht criteria. Following years of overheating lead to acceleration of inflation. 

The crisis after 2008 had heavy affects on CEE economies, they were more seriously hit than old members in growth and unemployment).

Inflation and budget performance of NMs diverged largely.

Convergence (real and financial)

Convergence is a necessary condition of efficient and successful integration.

Equalized levels are not demanded, but in the case of large differences (industrial and developing countries) the benefits may be unequally distributed.

In these cases, compensations: • asymmetric liberalization• financial aid (compensation);• technical and other types of assistance.

Convergence (real and financial)

Closer forms of integration (EMU) are more sensible from the point of view of real convergence.

EMU may aggravate (regional) differences, and budget (cohesion) transfers may be needed to compensate.

Monetary and fiscal convergence (the Maastricht criteria) are preconditions of stable monetary union, particularly of price stability.

Per Capita GDP EU27 - 100

Country 1960 1973 1990 2004 2009

Greece 44 71 58 94 93

Portugal 41 59 62 75 75

Ireland 63 61 74 142 146

Spain 59 77 76 101 107

Hungary 60+ - 41 63 64

+European average

Eurostat.

Per Capita GDP EU27 - 100

Country 1990 2000 2004 2009Hungary 41 56 63 64Czech Republic 61 69 75 82Slovenia 74* 79 85 89 Latvia 31* 37 46 49Estonia 31 40 52 56Poland 33 43 46 55Romania 25 23 31 43Germany 119 117 113Finland 118 117 117*1995Eurostat

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Convergence

Income per capita rose from 40% of the old Member States' average in 1999 to 52% in 2008.

Clearly, per capita GDP is far not satisfactory.

Deutsche Bank Research, convergence web is computed by 5 groups of indicators, based on a composite of 16 variables.

Hungary now at 62%, equal to the 1960s (to early 90s fell back to 43%). Questions about sustainability of catching up.

END

Thank You

Prof. Palánkai Tibor