EurActiv: Bulgaria, Romania Not Out of the Woods Yet*

Views on BG | December 7, 2010, Tuesday // 15:33|  views

From EurActiv

*Original title: Eastern EU countries face two-speed recovery

The eight East European countries that joined the EU in 2004 are bouncing back more quickly from the economic crisis than their Western neighbours, but Bulgaria and Romania, which joined three years later, are not out of the woods yet, according to the latest statistics. The EurActiv network gives a round-up of the situation.


Eastern EU countries were among the most severely hit by the economic and financial storm, which erupted in 2008.

Hungary, Latvia and Romania were among the countries forced to request international assistance following the financial turmoil.

In November 2008, the IMF, the EU and World Bank agreed a .1 billion economic rescue package for Hungary. It was the biggest loan for an emerging market economy since the global crisis began. 

On 29 November, the European Commission published its voluminous European Economic Forecast – Autumn 2010, confirming that Eastern countries were expected to lead the economic recovery in the EU.

Eastern Europe has experienced its worst economic recession since the Second World War, forcing EU countries such as Hungary, Latvia and Romania to request international assistance.

In 2008 and 2009, many Western investors were forced to scale back plans to develop business in the East, pushing down Poland's zloty, Hungary's forint and Romania's leu.

But these difficult times now seem to be over.

Last month, the World Bank published its regular 'EU10' report, noting that a rebound was visible in the economies of the EU newcomers in 2010. They are all expected to return to positive territory next year.

The economic recovery in Eastern Europe has been made possible thanks to competitive production costs, a skilled workforce and nimble entrepreneurs, according to the report. The countries were also helped by their close trade links with the rest of the EU.

The economies of Latvia and Romania are the only ones that are projected to contract in 2010, reflecting an adjustment from domestic booms in those countries in the run-up to the crisis, the World Bank says.

The upswing seems to be taking root across the region. Slovakia and Poland, which managed to avoid overheating in the run up to the crisis, were the region's fastest-growing economies in the second quarter of 2010.

Estonia returned to growth in the second quarter of 2010, after nine quarters of year-on-year contraction, and was the fastest-growing country in the EU in the third quarter. Latvia returned to year-on-year growth in the third quarter of 2010. Romania was the only country from the so-called EU10 still in recession in the third quarter of this year.

Below is an overview by the EurActiv network of the situation in several key countries:

Poland: The locomotive of recovery

The World Bank and the European Commission both note that the recovery in Eastern Europe has so far been driven by Poland. Poland was the only EU member to avoid recession and instead achieved economic growth in 2009, growing by 1.7%. Its GDP growth for 2011 is expected to be 3.9%, while projected average growth for the euro area stands at 1.5% and at 1.7% for the EU-27 as a whole.

Poland's GDP grew by 4.2% year-on-year in the third quarter of 2010, above expectations of 3.7%, according to preliminary estimates.

Indeed, the Polish economy continues to astound even the most optimistic observers. Higher than expected annual GDP growth is largely a domestic affair, with private consumption providing for half of the total. However, foreign trade figures are also positive.

Capital accumulation, a measure for investments plus inventory changes, offered 1.3 percentage points (pps) of headline growth. Fixed asset investments offered 0.1 pps of growth.

"I view the data with mixed feelings," Bank BZ WBK economist Piotr Bielski commented for Polish news agency PAP. He said he was slightly disappointed with the investment figure, which he said had not moved in the expected direction.

According to specialists, companies across the entire economy are seemingly still refraining from making large investments, even though their output capacities would suggest otherwise.

"Companies' output is already at levels seen before the crisis, and they need to invest to expand further. The low figure makes us hope for an investment rebound in the fourth quarter," Bielski said.

The Euro 2012 football championships, jointly organised by Poland and Ukraine, are seen as a boost to public investment, as several infrastructure projects are still to be finalised.

Anna Zielinska-G??bocka, a member of Poland's Monetary Policy Council, advised that the country should consider increasing its interest rate in December or the first quarter of 2011, as monetary policy should be adjusted to suit the macroeconomic situation.

Under the Polish constitution, an increase in public debt above 55% triggers mandatory spending cuts and tax increases. Public debt will probably reach 53% to 53.5% of gross domestic product at the end of 2010, Polish Finance Minister Jacek Rostowski has said.

Poland is expected to do its utmost to avoid such a situation, as the country is facing general elections next year.

Gradual improvement in Czech Republic

The Czech economy, which enjoyed buoyant economic growth of around 6% on average from 2004-07, suffered from the global crisis due to the high degree of trade openness in the country's economy.

In line with the gradually improving global economic environment, real GDP growth turned positive in the third quarter of 2009. In addition, the Czech banking sector has remained strong. This, according to the European Commission, reflects the good liquidity situation of Czech credit institutions and low dependence on cross-border lending.

After an unprecedented slump in 2009, investment growth is expected to return to positive territory as soon as 2010 (1.7%), the Commission writes in its latest economic forcast.

According to preliminary data from the Czech Statistical Office, published on 12 November, the country grew faster in the third quarter of 2010 than most analysts had anticipated. While they had predicted growth at around 2.5%, the official estimates of 3% took them by surprise. The Czech economy expanded not only on a yearly but also on a quarterly basis with 1.1% growth – beating market expectations.

Experts agreed that growth had been driven by demand from neighbouring Germany, but warned that it may yet slow again in the coming months. Domestic demand, on the other hand, has not picked up yet, so the growth owes mainly to exporting industries.

Overall, markets expect the Czech economy to expand by more than 2% in 2010. Yet they remain less optimistic for 2011. While the latest prognosis from the World Bank, published on 18 November, expects the country's growth to reach around 2.6% in 2011, the European Commission believes it will grow more slowly, at 2.3%.

Czech analysts also believe that the figures may be too optimistic. Domestic demand remains low but the austerity measures adopted by the government will have an impact, they warned. Early in November, the Czech Central Bank (?NB) lowered its outlook for 2011. It said that the austerity package could restrict growth to 1.2%, down from 1.8% in its previous August forecast.

"The economy has gone out of recession, but the growth is expected to slow down next year, mostly due to budgetary cuts. We expect more robust recovery in 2012," said Miroslav Singer, Central Bank governor.

But the markets seem to have downplayed the Central Bank's fears, labelling its prognosis "too pessimistic". Estimates from the Ministry of Finance are also brighter, with 2.2% GDP growth expected in 2011.

Slovakia benefits from lucky euro timing

According to the World Bank's economic outlook, Slovakia can expect growth of 4.1% this year and 4.2% in 2011. The Commission had put this figure at 3%.

The Slovak recovery compares with similar trends in neighbouring countries and confirmed earlier suggestions that the country's euro adoption in January 2009 made a major contribution to Slovak competitiveness, resulting in faster growth.

For 2011 and 2012, it is assumed that better usage of EU funds, together with a revival of highway projects and a gradual improvement in global economic prospects, will have an overall positive impact on investment growth.

Vladim?r Va?o, chief analyst at Volksbank Slovensko, nevertheless cautioned that the strong recovery this year will contribute to a statistical lowering of annual growth figures in 2011. The open Slovak economy depends predominantly on external demand, Va?o told He expects external demand to continue to be the main driver of further growth.

Indeed, external demand from Germany and other eurozone countries softened in the second half of the year. External demand (net exports) and a gradual recovery in investments are thus expected to be the major drivers of growth in the third quarter, Va?o said.

Va?o also warned that high unemployment and labour market uncertainty will continue to weigh on household consumption, while the urgent need for fiscal consolidation will continue to curtail government spending.

Va?o argued that government spending will not avert recession (as seen last year), nor reverse an ongoing recovery. But he does expect it to strangle growth figures a bit, in the range of few tenths of a percentage point.

Speedy and decisive fiscal consolidation is therefore the best contribution that government can make to securing high ratings for Slovakia, healthy public finances and stability of the tax system, which all play a role in the investment allocation decisions of potential foreign direct investors, Va?o concluded.

Hungary: Policy measures to address the problems

Both public and private research companies rate Hungary's short-term growth prospects slightly higher than the World Bank, with around 0.9% growth predicted for 2010 and 2.9% in 2011.

In autumn 2008, Hungary was hit particularly badly by the global financial crisis, pushing its borrowing costs on financial markets to unsustainable levels. In October 2008, Hungary became the first country to receive an EU bailout. As the government implemented its adjustment programme, supported by a joint EU-IMF financial package, the situation stabilised and the country was able to return to markets in July.

Since early 2010, financial market conditions have continued to improve and uncertainty about the recovery has gradually subsided while investor confidence has picked up, according to the Commission. The positive mood was illustrated by several new flagship investments by the auto industry, with car production capacity set to expand to match production levels in Slovakia.

The upturn in economic activity has been supported primarily by recovering exports, reflecting better than expected global demand.

On the negative side, high unemployment and more recently higher interest costs on Swiss franc-denominated mortgages due to the depreciation of the Hungarian forint have kept a lid on disposable income and consumption.

The new government has announced several policy measures designed to address these problems.

Household consumption is expected to receive a boost from personal income tax reform, which will introduce a combination of a 16% flat tax with substantial tax credits for households with children.

Labour supply, especially for high-skilled individuals, is expected to be boosted by a declining labour tax wedge, while employment – and especially investment – will receive a further fillip from corporate income tax cuts and significant foreign direct investment (FDI) projects announced in the autumn of 2010.

After very tough austerity measures in 2009-2010, which successfully reduced government borrowing but also made the economic recession worse, Hungary's government has found a way to offer a mini-stimulus next year: it will suspend private pension funds and use their savings.

This new source of revenue – which in fact means spending wealth saved over 12 years – will allow the country to meet its deficit target without further holding back public demand.

This should support a higher short-term growth path than calculated by the World Bank. However, the longer term effects of this policy make growth and public spending a heated topic. While the Finance Ministry has forecast a continuous acceleration of growth for the next four years in its budget forecast, this was not supported by the macroeconomic models of the Budget Council, a fiscal spending watchdog set up in 2008 after Hungary received a bailout from the EU, the IMF and the World Bank for reckless public spending.

The governing party, Fidesz, using its constitutional majority on the legislation, immediately decided to disband the watchdog.

Romania 'not out of the woods yet'

According to a mid-November report from EU statistical office Eurostat, Romania's economy contracted by 0.7% in the third quarter, a bad performance only surpassed by Greece, whose economy contracted by 1.1%.

According to the Commission, the long duration of the recessionary period is mainly a result of unsustainable developments in Romania's economy which pre-date the international crisis. The economic boom in the pre-crisis period – which saw real GDP growth average 6.8% in 2004-08 – was underpinned by strong domestic demand. The latter was fuelled by a pro-cyclical policy of generous increases in public wages and pensions, and also by bank lending, most of which was labelled in foreign currency.

As a result, Romania entered the recession with a budget deficit of 5.4% of GDP and a current account deficit of 12.7%. This vulnerable position created additional stress in local financial markets and limited the scope for any government stimulus to prop up the economy.

With the onset of the crisis, Romania asked for financial assistance in the form of a multilateral loan package totalling ?20bn from the EU, the IMF, the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development. This assistance is still ongoing and loan disbursements are conditional on implementing an adjustment programme which aims to bring down the budget deficit, promote structural reforms and restore stability to financial markets.

Real GDP growth is expected to decline by 1.9% in 2010, mainly due to faltering domestic demand. Investment spending has been hit hard by political uncertainty and high risk premia associated with the country and the region.

The current account deficit is projected to deteriorate this year to 5.5% of nominal GDP, from 4.5% in 2009, primarily due to lower workers' remittances. Still, this ratio represents a substantial improvement from the double-digit rates recorded in 2006-08.

The economy is expected to turn around in 2011, with real GDP expected to increase by 1.5%.

After falling severely in 2009 and 2010, investment should pick up vigorously by 4.2% and is expected to be a main driver of growth.

Lately, a consensus has been building up in Bucharest about the economy timidly returning to positive growth figures next year. The presidency, the government, the National Bank, the World Bank, the IMF and the European Commission are betting on Romania's GDP returning to growth in 2011.

According to the National Prognosis Commission, quoted by, the growth will be export-driven, as external demand is expected to grow. But there are fears that external demand might be slowed down by protectionism and currency wars.

Lucian Croitoru, counsellor to the National Bank Governor, was quoted by as saying that economic growth will only be visible in the second quarter of 2011, whereas the growth potential is low in the short term. He also said that Romanians tend to be too pessimistic, leading to a
difficult pick-up in consumption.

Economists at ING Bank Romania, who are regarded as very pessimistic, recently revised their forecast regarding Romania's 2010 GDP, from -2.8% to -1.6%, due to "the positive surprise of the GDP in the third quarter". They expect the economy to return to a positive trend in 2011, but only by 0.2%.

Bulgaria: Struggling to bottom out

Bulgaria entered into recession relatively late compared to its neighbours. Economic activity contracted by 4.9% in 2009 and the deterioration continued into the first quarter of 2010, when the recession is believed to have bottomed out.

Growth resumed in the second quarter and is expected to gain momentum by the end of the year. This underlying growth trend would result in a broadly flat real GDP growth rate for 2010 as a whole.

This year, the country's industrial output remained at low levels. In addition, retail trade and construction are still depressed, while credit growth is only minimal.

According to the Commission, private and government expenditure will be lower for the year as well, declining by 3.6% and 2.4% respectively. The overall tight credit market conditions, falling FDI inflows and continuing household and corporate sector balance sheet adjustments are some of the main factors behind the enduring negative domestic demand dynamics in 2010.

Growth in 2011-12 will remain well below the pre-crisis average, thus temporarily slowing the catching-up process, the Commission says. The figures it has put forward are of 0.1% GDP growth for 2010, 2.6% in 2011 and 3.8% for 2012.

However, the Bulgarian government came with more optimistic figures. The country's finance minister, Simeon Djankov, estimates that GDP will grow by 3.6% in 2011 and 4.7% in 2012.

Lybomir Datsov, former finance minister, described these forecasts as "unrealistic". To achieve such growth rates, more foreign direct investment is needed, a prospect which he said should not be expected due to what he described as a "hostile policy" from the government towards foreign investors.

Datsov also criticised the government for its "lack of strategy" and "lack of will" for reform in all policy areas.

Economist Georgi Angelov from the Open Society think-tank also thinks the cabinet's forecasts are too optimistic. He said the government had yet to prove its reformist ambitions and channel financial means to more effective economic areas. Angelov also warned that agriculture was becoming a "budget vampire" that would deplete the country's budget.

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Tags: Bulgaria, Romania, Poland, Hungary, Slovakia, Czech Republic, econmoic crisis, economic recovery


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