Central and eastern Europe:Outlook and expectations for the next 18 months

Matthew SherwoodSenior editor/economistDeputy, Country Risk Services

June 2002

Topics

Economic forecasts

Business environment

EU accession

Central Europe is looking good

Central European growth weathers the EU slowdown

Inflows of FDI fueling growth, productivity and restructuring

Fiscal deficits remain a concern Current-account deficits also a potential

problem Inflation heads towards convergence

with the EU

00.5

11.5

22.5

33.5

44.5

2001 2002 2003

Cz Rep Hungary Slovakia Poland EU

Respectable GDP growth

Source: EIU Country Data

% real change

-6

-5

-4

-3

-2

-1

0

2001 2002 2003

Cz Rep Hungary Slovakia Poland

Budget deficits boom

Source: EIU Country Data

% of GDP

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006

Cz Rep

Hun

PolSlo

EU-3

Ref

Inflation: towards convergence

av % change

Source: EIU Country Data

-9-8-7-6-5-4-3-2-10

2001 2002 2003

Cz Rep Hungary Slovakia Poland

Twin deficit problems return?

Source: EIU Country Data

% of GDP

1

2

3

4

5

6

7

8

2001 2002 2003

Cz Rep Poland Hungary Slovakia

Inflows of FDI remain strong

US$, bn

Source: EIU Country Data

0

100

200

300

400

500

600

700

800

2001 2002 2003

Cz Rep Poland Hungary Slovakia

Per capita FDI paints another picture

US$

Source: EIU Country Data

Eastern Europe is left behind?

Growth is no longer a problem Budgets actually look good Inflation has yet to be tamed Current-account balances: “left-outs”

versus the former Soviet Union Where’s the foreign investment?

0

2

4

6

8

10

2001 2002 2003

Bulgaria Romania Russia Ukraine

Strong growth in eastern Europe

Source: EIU Country Data

GDP, % real change

-4

-3

-2

-1

0

1

2

3

2001 2002 2003

Bulgaria Romania Russia Ukraine

Budget balances: a mixed performance

Source: EIU Country Data

% of GDP

048

12162024283236

2001 2002 2003 2004 2005 2006

Bul

Rom

Ukr

Rus

Inflation: Much to be done

CPI, av % change

Source: EIU Country Data

-8-6-4-202468

1012

2001 2002 2003

Bulgaria Romania Russia Ukraine

Current-account balances

Source: EIU Country Data

% of GDP

0

25

50

75

100

2001 2002 2003

Bulgaria Romania Russia Ukraine

Per capita FDI inflows remain paltry

US$

Source: EIU Country Data

EU enlargement: What could go wrong?

Enlargement in 2004: The dates Developments to watch negotiations run late Ireland rejects the Nice treaty public opinion turns against

enlargement Risk scenarios Implications for euro-zone accession

The Commission’s Road Map

1998 1999 2000 2001 2002 2003 2004 2005

Start neg. Luxembourg 6

Start neg. Helsinki 6

End of negotiations

Ratification & referenda

Accession

EP election

Danger points

1998 1999 2000 2001 2002 2003 2004 2005

Start neg. Luxembourg 6

Start neg. Helsinki 6 End of

negotiations

Ratification & referenda

Accession

EP electionIreland rejects Nice treaty

Ireland rejects Nice treaty again

Negotiationsrun late

Accession treaty opposedEU accession rejected

Accession?

Negotiations: The status quo

Agreements on most policy “chapters”, including migration, environment, competition, tax…Money issues left to the end: farm aid, regional subsidiesImplementation & enforcement lagging

0

10

20

30

CZ ES SL HU Pl SK LT BG RO

Policy chapters closed

2000 2002

What is behind the budget row?AC-10 as % of EU-15

0

25

50

75

100

Po

pu

lati

on

GD

P

GD

P P

PP

GD

P p

erh

ead

PP

P

Far

mer

s

Far

m la

nd

What’s behind the budget row? -2-

CAP: Farm subsidies to be

phased in over ten years Starting at just 25% of EU

Rural development spending only 10% of CAP budget

No final EU position until after German election

New members could be net contributors to EU budget?

Structural funds: Regional aid phased in

over three years All AC-10 eligible for

regional aid (per capita GDP < 75% EU av.)

Aid flows capped at 4% of GDP

Big budget row postponed until 2006?

Nice treaty

EU summit in Nice in 2000 agrees on institutional changes necessary for enlargement:

adjustment of voting weights in the Council of Ministers

reducing the number of portfolios (and Commissioners) in the Brussels bureaucracy

Ireland rejects Nice treaty in June 2001 May do so again in second referendum in

October/November 2002

What happens if Ireland says no?Scenario 1Institutional provisions pasted into the Accession treatyAccession treaty ratified

But:Political setback at a time when enl. talks are in their “hot” phaseLoss of political momentum, Euroscepticism Accession likely to be delayed

Scenario 2Institutional questions handed over to the Convention, which prepares the next Intergovernmental Conference (IGC)ICG concludes in 2004?New treaty ratified by 2005?

Enlargement 2006 or later?

Public opinion: The EU-15

Accession treaty needs to be ratified by 15 EU parliaments (and EP)

A majority is against EU enlargement in France, Austria, Germany...

Fears of migration despite 5-7 year transition period

Rise of the far right could further complicate accession talks or draw out ratification process

Public opinion: EU-15Is EU enlargement beneficial?

0%

50%

100%

EU-15

F A D UK E

Don't know

Not beneficial

Beneficial

Public opinion: The candidates

Accession treaty needs to be ratified by parliaments

Most (all?) EU candidates will hold referenda on EU accession after the end of the accession negotiations

Public opinion is still in favour of EU accession in most countries

Rising Euroscepticism Resentment against EU attempts to get

enlargement “on the cheap”

Public opinion: The candidates

0%

50%

100%

AC13

PL CZ HU LV ES RO

Would not voteDon’t knowAgainstFor

Risk assessment

Negotiations run late (high risk) Ireland rejects the Nice treaty (high risk) Public opinion turns against enlargement

(moderate risk)

High risk that EU enlargement will be delayed until 2005

Moderate (but growing) risk of longer delays Euro-zone membership in 2006-2007 unlikely