Future Considerations and Challenges
Even if CEE economies manage to return on the convergence path its speed will be much slower than it used to be before 2008.
—Marek Dabrowski
Overview
In the preceding chapters, we have provided an introduction to historical context for eastern Europe’s integration into the European Union (EU), a survey of convergence and divergence among the individual Central and Eastern Europe (CEE) states, a careful examination of the challenges to entering CEE markets, and an assessment of political risk in the democratic transition states. Drawing on these analyses, this chapter will conclude our discussion with future considerations and challenges for the economies and politics of the CEE states.
“The Emerging Europe and Central Asia region is facing some daunting challenges amid a cloudy outlook for growth,” said Laura Tuck, Vice-President for the World Bank’s Emerging Europe and Central Asia region. “The tensions in Ukraine have clearly had an impact on the country’s growth and have disrupted economic activity. But many of the structural problems that confront countries in the region existed before the crisis and still need to be urgently addressed.”1
Although reports in late 2014 and early 2015 warned of a cloudy economic outlook in the CEE states, they showed solid growth in 2015. Strong domestic demand, particularly private consumption, was strengthened by falling unemployment, higher real wages, improved credit growth for consumers as well as lower commodities prices, which supported households’ disposable income. After a mild slowdown in the second quarter of 2015, the region’s economy gained some momentum in the third quarter. CEE’s gross domestic product (GDP) expanded 3.4 percent year-on-year in the third quarter of 2015, which was above the 3.2 percent increase in the second quarter. Data across the region showed that almost all economies in the CEE picked up pace in the third quarter.2 The exceptions were Estonia—where GDP cooled notably in the third quarter3—as well as Hungary and Slovenia. Economic growth in the Czech Republic inched down in the third quarter relative to the second quarter, but was still robust.4
Volatility in the global financial markets in 2015 was driven by several factors, including concerns about the potential for a new Greek crisis (Grexit) in May 2015, the Chinese slowdown in the second half of 2015 and the fall in global commodities prices throughout the year. With respect to CEE states, the re-emergence of concerns about a “Grexit” and the corresponding correction in 10-year bonds in the eurozone (particularly German bunds) had little impact on financial markets. Economists believe this was due to high confidence among investors and the European Central Bank’s (ECB) asset purchase program, known as quantitative easing (QE), the spillover effects of which had a positive effect in equity and bond markets across the CEE.5
Meanwhile, concerns about the Chinese slowdown also had little impact on the region as trade links between the CEE economies and China are relatively small (see e.g., Chapter 1). Some economists argue that the impact that China’s rebalancing has on global commodities prices actually had a positive effect on the CEE economies’ terms of trade.6 That said, these economies are not immune to an increase in global risk aversion, which could result in sustained capital outflows, potentially impacting the CEE states (such as Hungary and Poland) that rely on a high share of foreign direct investment in their local markets.
Outlook in 2016
Most economists expect the CEE’s economy to continue expanding at a solid pace in 2016. The region will continue to benefit from the recovery in the eurozone as well as from still-low commodities prices. Forecasters surveyed by Focus Economics expect that the economy of the CEE will grow at a healthy 3.1 percent in 2016.7
However, the potential for a stronger-than-expected impact of the normalization of the U.S. monetary policy, risks to trade and capital flows stemming from a possible further slowdown in emerging economies, and the ongoing refugee crisis could all create challenges for the CEE states in 2016. The improving growth outlook for 2016 reflected that growth projections for Bulgaria,8 Croatia,9 and Romania10 were raised over the previous month, while forecasts for the remaining economies surveyed were left unchanged. Latvia was the only country for which forecasts were cut.11
“The Emerging Europe and Central Asia region is facing some daunting challenges amid a cloudy outlook for growth,” said Laura Tuck, Vice-President for the World Bank’s Emerging Europe and Central Asia region.
The tensions in Ukraine have clearly had an impact on the country’s growth and have disrupted economic activity. But many of the structural problems that confront countries in the region existed before the crisis and still need to be urgently addressed.12
As discussed in Chapter 6, political risk within the CEE states and in the region at large can create potential challenges for growth and stability.
The other potential regional factor to consider is stability within Russia, as emerging European states would benefit from stabilization in the state’s sizeable economy. If the Russian economy is able to stabilize in 2016, this should ease the pressure on the Commonwealth of Independent States (CIS) countries that have been impacted by lower trade, investment, and remittances from their neighbor.
In the same respect, stabilization in Russia, stronger growth in the EU, low interest rates, QE in the ECB, and subdued commodity prices should contribute to the CEE growth. Regional political tensions should not detract from the excellent progress that many CEE states have made in terms of reform and growth, but analysts point that there are still political, institutional, and policy challenges that remain.
The CEE states experienced several significant periods of transition in the 20th century, marked by the events of 1918, 1945, and 1989. In both 1918 and 1945, the CEE and Balkan economies were suffering from devastating losses, destruction, and dislocation. Although they needed to focus on economic restructuring and stabilization, they did not have to profoundly reinvent their economic and political systems. The post-1989 transformations, however, were complicated by large foreign debts and debt-service payments inherited from the outgoing communist regimes. They were not in the process of recovering from a World War, but did struggle to recover from a state of economic collapse, high levels of inflation, severe infrastructure neglect and decay, environmental crises, the political anxieties of the Cold War, and, in some cases, internal ethnic conflict.
In our text, we have highlighted CEE as a region in “transition,” exploring the historical, political, social, and economic transitions of the individual states and country blocs. Our work analyzed the economic impact and challenges promoted by the EU enlargement into CEE economies, and how it has contributed to the economic growth of these countries. This growth has not been without challenges, and in this respect, we discussed strategies employed by CEE states to adjust to the recent global financial crisis. In Chapter 5, for example, we noted that the CEE states, a part of the world often neglected by investors and business leaders, have shown themselves to be resilient, exhibiting impressive growth and maturity, both economically and politically. In the context of that economic and political growth, we reminded readers of the importance of political risk by providing state-by-state surveys of the impact of a series of political and economic risk assessments.
We hope that this information has provided the reader with an introduction to the economic and political structure of CEE states, as well as an overview of the principle criteria in evaluating emerging market (EME) countries, which constitute approximately 80 percent of the global population and represent about 20 percent of the world’s economies. EMEs are characterized as transitional markets, meaning they are in the process of moving from a closed economy to an open market economy, while building accountability within the system. EMEs must also balance this tremendous potential for reform and growth against local political and social factors as they attempt to open up their economies to the world. Those living in transition countries may be distrustful of foreign investment, or because of national pride, may be opposed to having foreigners owning parts of the local economy. The process of emergence may be difficult, slow, and often stagnant. As many of the CEE case studies examined in our work have shown, many emerging economies through the transitioning eastern European region may be able to look forward to brighter opportunities and offer new areas of investment for foreign and developed economies, while still balancing the impact of an open economy on their citizens.
1 “Cloudy Outlook for Growth in Emerging Europe and Central Asia” (2014).
3 Jean-Phillippe Pourcelot (2015).
4 “Czech Republic Economic Outlook” (2016).
8 “Bulgaria Economic Outlook” (2016).
9 “Croatia Economic Outlook” (2016).
10 “Romania Economic Outlook” (2016).
11 “Latvia Economic Outlook” (2016).
12 “Cloudy Outlook for Growth in Emerging Europe and Central Asia” (2014).