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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.
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