Economic crisis in CEECs

Last update: 02 10 2009

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Background

But leaders were not able to reach common strategy how to prevent economic tragedy and so after dramatic collapse of Lehman Brothers the strongest economies in euro zone with collapsing banking and mortgage sectors entered the worst recession since Second World War. Germany, Europe's largest economy officially plunged into recession as GDP fell by 0.5% in the last quarter, extending a 0.4% drop in the previous one, the German statistical office reported in November 2008.  The pace of the downturn in Germany also dragged down Europe's other economies. Fall in demand damaged production, especially auto industry, major contributor to the EU´s GDP with an annual turnover of €780 billion and a value added of over €140 billion. Before crisis loomed - EU was the world's largest producer of motor vehicles, producing over 18 million vehicles a year and almost a third of the world's passenger cars.

In December 2008 heads of EU states and governments adopted fiscal stimulus package representing "around 1.5%" of the EU's GDP or "around 200 billion euro". Measures listed in the EU's 'toolbox' include - increased support for the unemployed and the poorest households, which have been hit hardest by the economic slowdown, funding large infrastructure projects, temporary VAT cuts across the whole economy, and lowering taxes on labour, in particular VAT on 'labour-intensive' sectors such as hairdressers and restaurants. A lot of critical words fell on European approach, because USA considered stimulus as not sufficient and asked Europe to spend more. But Europe rather focused on financial regulation to prevent similar crisis in future and insisted without additional stimulus it will be easier to find exit strategies from government spending.

EU's executive arm predicts the economy of the 16-country euro currency zone would shrink 4.0 percent this year and by 0.1 percent next year. International Monetary Fund expects the euro zone to contract 4.2 percent this year and 0.4 percent in 2010. In the wider, 27-nation European Union, the economy would also contract by 4 percent this year and 0.1 percent in 2010, the Commission said.

• Visegrad group

Eastern European Countries, new member states, were hit hard by crisis, especially because of their pro-export oriented economies and big losses because of falling national currencies. Hungary, Latvia and Romania have tapped billion euro bailouts from the European Union, the International Monetary Fund and others.

In the  first quarter of 2009 all V4 states registered negative growth except Poland (+ 0,4 %), Eurostat informed. Slovakia recorded the biggest (- 11,4 %) GDP fall in EU compared with the last quarter of 2008 when it in contrast registered biggest GDP rise in the bloc of 27 countries.

Regions were lately given a flash light of chance for economic recovery. Germany (the most importat export market) and France both saw growth of 0.3% in the second quarter and emerged from recession. Analysts believe the economy should rally as firms ramp up production and rebuild their depleted stocks, though rising unemployment and the expiry of a "cash-for-clunkers" car subsidy plan that has boosted private consumption pose risks to growth.

• CZECH REPUBLIC

A survey by the Czech Chamber of Commerce in June showed worsening access to credit is forcing companies to cut costs. Three quarters of firms had to scale down their activities due to the lack of finance, and more than half postponed or cancelled planned investments.

Cash flow problems have forced 25% of companies to shed staff or to sell some property. Half of all respondents to the survey declared that banks have become less willing to provide them with credit over the last three months.

The Confederation of Industry of the Czech Republic stated in its June quarterly report that 92% of Czech industrial companies perceive the problem of late payments as more serious than the year before. However, Tomáš Bartovský, spokesperson for the Ministry of Industry and Trade, said that late payment penalties are already covered by Czech legislation and there are no special provisions planned to deal with the issue.

Bartovský also said that the Czech government has launched a programme called 'Guarantees', which is designed to provide deposit guarantees to Czech industry. The one billion Czech crown scheme has met with considerable success, and business groups want the ministry to broaden its scope to include the services and trade sectors. However, Bartovský told EurActiv that the government had no intention of doing so.

The colleague of Tomáš Bartovský from the MPO Press Department Matyáš Vitík adds that the Czech government focuses on „the supply side of the economy“ rather than on stimulating domestic demand. „Approved measures are cross-sectional, focused on all sectors of national economy,“ said Vitík for EurActiv adding the list of already implemented or planned measures.

The Czech parliament has already approved faster write-offs, lower social insurance for employers, abolishing of income tax advance payments, increasing income lump sums for micro enterprises  (enabling lower tax burden) or decreasing VAT rates of some services. The Czech government tries to cut red tape on permanent basis.

Industries exporting their goods abroad appreciate (apart from 'Guarantees') new version of law dealing with state support to export insurance or other measures designed to boost exports which are in place since the beginning of 2009. Moreover, the parliament supported faster administration of EU operational programmes (projects could be divided into several parts so that entrepreneurs could get EU money faster).

An amendment to insolvency law yields more flexible rules to companies that went bankrupt. It particularly helps their employees who got the right to receive seven month salaries even after insolvency procedure has been started.

According to macroeconomic prediction by Ministry of Finance of the Czech Republic anti-crisis measures will cost some 90 bilion Czech crowns only in 2009. The Ministry expects that this year's budget deficit rises to 198 bilion crowns (5.5% GDP).

Czech GDP slumped by 3.4% in the first quarter of 2009 (on yearly basis), consumer prices rose by 0.3% in July and unemployment rate jumped to 8.4%. Today, predictions of several international institutions on average assume that Czech economy is going to fall by 3% this year and is going to rise a little next year.

• HUNGARY

Hungary was the first country in the European Union that asked for financial support from the international institutions. After the collapse of the Lehman Brothers in the US, also banks in Hungary started to raise their risk premiums. As the Hungarian GDP was small in comparison with developing market oriented countries, and budget deficit remained huge, but the reserves were tiny, investors left the country and were looking for a safer place. Hungary had to find quick solution.

The International Monetary Fund (IMF), the EU and the World Bank together gave a 20 billion euro standby loan to the country. Until now 8.6 billion euros were used from the IMF loan, and further 5.4 billion from the EU sources. From the together 14 billion euros, 8 billion have been used, the rest is enlarging the country’s reserves.

In response to the crisis, Hungary took steps at two key areas: fiscal stability and financial stability. The government took radical steps to diminish costs, and bring the spending to a sustainable rate. All together spending has to be cut by approximately 5 billion euros in 2009-2010.

“At the same time, to avoid exacerbating the economic contraction, the authorities allowed the fiscal deficit to increase somewhat” – IMF states. The Fund has a positive view of Hungary’s steps and is optimistic about its success.

“Altogether, the government is expected to improve its underlying fiscal position by about 4 percentage points of GDP in 2009, and a further 1 percentage point of GDP improvement is planned for 2010. This means that, once economic activity fully recovers from the crisis, the overall government budget should be close to balance.” – IMF wrote in a press release in August.

The government expects the GDP fall by 6.7 percent, the inflation to reach 4.5 percent and the budget to close with a 3.9 percent deficit in 2009. With the GDP loss and the cost-cutting measures, the state income will fall, therefore the cutting of taxes becomes impossible, furthermore, IMF forbid the government to do so until the end of 2010.

Taxes in Hungary -especially regarding the costs of employment- are extremely high in the Central and Eastern European region. Therefore, cutting taxes are always in the center of political campaigns. Although experts often urge the simplification of the system, only small changes in different types of taxes occurred in the past years, and no overall reform could be implemented.

The Hungarian European Business Council (HEBC), a group of top managers of the Hungarian affiliates of major European industrial enterprises, advised the following to the Hungarian government in august 2009: “In the opinion of HEBC the various forms of tax-free benefits should be abolished as they help tax evasion in an institutionalised form. It is a cultural reflex in Hungary that people seek alternative solutions to paying taxes. Twenty years after the change of political system no one questions that taxes must be paid. Despite this, few people pay and those who do, pay high taxes. The circle of taxpayers obviously needs to be widened as much as possible. The tax-paying morale would improve if the taxes paid were used in a fully transparent system and people could be proud to see what is being built and developed from their taxes.”

In August 2008 just before the financial crisis hit Europe, Prime Minister Ferenc Gyurcsány announced a tax package, but the steps were strongly criticized by the media, saying that the measures used are “non-convergent” and without any long term concepts. However the crisis rewrote the screenplay and both the prime minister and the tax reform was changed.

After Prime Minister Gyurcsány resigned in April, new minister of finance, Péter Oszkó announced, that no cutting of taxes is to except until end of 2009. On the condition that IMF agrees to leave the budget deficit goal rise over 3 percent this year, he envisaged such a possibility for early 2010.

The new government introduced the Bajnai-package, named after the new prime minister Gordon Bajnai. The package contained the elevation of general VAT-rates from 20 to 25 percent, with some exceptions: dairy products, wheat, flour, or starch-made products and district-heating costs pertain under a preferential, 18 percent tax rate. Excise duty for cigarettes, fuel and alcohol has grown. The income-tax classes have been changed, so the net income of the most employees rose. However this also means that the crisis-hit enterprises, when deciding about next years financial policies, will probably chose not to increase the gross income of the employees.

Nevertheless, when IMF officials visited Hungary in may 2009, the Fund allowed a softer budget policy for the country, but it strictly forbid any mitigations in the tax policy, as –opposite to earlier hopes - the deficit will probably reach the now set target of 3.9 percent.

The jump in the unemployment rate was not so heavy in the country as in other member states, but from the approximately 8 percent in the third quarter of 2008 it reached the level of 9.8 percent until July 2009. By now, as an overall optimism emerged during the summer, that the hardest times might be over, unemployment rates seem to stagnate.

Several economic rates also painted a less gloomy picture then few months before. In some sectors, including real estate, energy and transport, investments increased.

The light of hope is however not too strong. Analysts agree that the growth in investors’ confidence can be very fragile. IMF officials see this process as the result of good governmental crisis-management.

“A chronic problem of the Hungarian society is the low self-esteem”, Hungarian European Business Council (HEBC) writes in it’s report, published in early August 2009. HEBC members are top managers of the Hungarian affiliates of major European industrial enterprises.

HEBC believes that although the country has fallen back in the last years, it is still in competition, still has it’s advantages, and this should not be forgotten.

“(…) it is a task for the Government to further strengthen these advantages with appropriate, focused measures and in light of the country’s strengths attract further new investments.” – it states.

“One of Hungary’s biggest strengths is still its human capital, human knowledge,” the group says. Therefore HEBC not only advices to use economic measures, but also stresses the importance of social and educational reforms. Education and training “must take the requirements of the economy more into account” and “the emergence and strengthening of a middle class, a group that plays an extremely important role in the life of every country”, is needed to successful recovery.

Besides of a sustainable employment policy, tax reforms, supporting measures for SMEs, the reform of public administration and local governments, etc. HEBC also sees a great opportunity in the 2011 EU presidency of Hungary.

Criticizing the internal political debates, HEBC urges the “creation of a positive country image” based on “common will”, as “Hungary has still not utilised the possibility of co-operation”.

• POLAND

Poland could emerge from recession in 2010, say experts. Poland predicts gross domestic product (GDP) growth of 1.0 percent this year, which would make it a notable exception in the EU, particularly among ‘new’ EU member states, fighting their way out of the economic crisis.

The International Monetary Fund (IMF) is more pessimistic, however, and has stressed that Poland's economy will likely shrink by 0.7 percent.

Indeed, the outlook for Polish industry is improving. While July witnessed the tenth consecutive month of decline in production output, the figure was clearly lower than in June, analysts stressed.

The most optimistic forecasts claim that in July, industrial production decreased by only 1.5% (after falling in the previous month by 4.3% and about 15% at the beginning of the year). According to the most pessimistic figures released, the decline reached 4.3%. “This gives an average of 2.9%,” Dziennik reported.

Tomasz Kaczor, chief economist at the Polish state-owned Bank BGK, emphasised the positive impact of the German and French recovery, announced by the European statistical office Eurostat. But Ludwik Sobolewski, president of the Warsaw Stock Exchange, said in an interview with Rzeczpospolita that “talks about the end of the crisis are only marketing”. However, he is optimistic for the Polish market. “It is certain that the financial depression which touched Western Europe is not going to reach us at a later stage,” Sobolewski told the national newspaper.

Analysts are convinced that the situation will improve month by month. Marcin Mrowiec, the chief economist of Pekao bank quoted by Dziennik, is convinced that from the fourth quarter of 2009 the dynamics of production will be positive.

These developments beg the question: Why is recession in Poland less severe than in the other central and eastern countries? Following the demise of U.S. investment bank Lehman Brothers, the Polish interbank market froze, as happened elsewhere, the IMF said.

But thanks to its large domestic market, Poland’s growth remained slightly positive in the last quarter of 2008 and first quarter of 2009, the IMF reported. Janusz Dancewicz, an expert from the DZ Bank says that Poland didn’t have to struggle with the crisis as much as other countries because of export. Polish economy is still quite closed, and export makes only 30 % of the PKB (twice less than in Slovakia or Czech Republic).

Poland entered the crisis with relatively healthy fundamentals. Moreover, the credit system is less developed in Poland than in the USA. “Leave credits and learn to live without artificial support” in order to stop the recession, Witold Gadomski wrote in an op-ed in the Gazeta Wyborcza.

“Despite the revival in the coming years we will face a high budget deficit and growing debt,” Gadomski warns. “These problems do not remain indifferent to the real economy,” he writes. “It will require a reform of public finances, of the tax system, a flexible labor market, better public investments, and an increase in the level of education,” he concluded.

• SLOVAKIA

Slovakia, the former Central Europe tiger, was hit hard by plummeting demand in Germany, its main export market, despite healthy banking sector. The magnitude and extent of the global slump led to a sharp decline in Slovak economic activity in the first quarter of 2009. The unemployment rate soared, and inflation decelerated rapidly.

Instead of robust growth of 6,9 % predicted for 2009 before the crisis loomed, the largest per capita car producer in EU now faces 6,2 % contraction, Ministry of Finance estimates. Electronics and three car factories helped Slovakia to gain 10,4 % growth in  GDP in 2007. Minister of Finance Jan Počiatek now admits, to be as strongly focused on vulnerable car production, in not any good.

On January 1 Slovakia joined eurozone with hope it will provide some protection against negative impact of global downturn. But the indicators showing that economy is going to feel full force of turmoil were growing. Government launched a 332-million-euro plan to protect jobs and boost domestic demand. Instead of helping domestic market Slovaks started shopping trips to Poland or Hungary as their national currencies plunged against euro.

To help plunging car industry government also introduced car-scrapping bonus to boost car sales, mirroring similar subsidies in France and Germany. The first wave was launched in early March and the second in April. Government allocated 55 million euro to subsidy purchase of 44,200 new cars.

According to Ministry of economy, in June the number of cars purchased or ordered using the bonus amounted to 35,897 units. National Bank of Slovakia estimates the direct affect of initiative on the GDP is about 0,05 %. But economic daily Hospodárske noviny pointed also on negative consequences of scheme – growing number of cars bought with state bonus left in car bazaars because owners are not able to pay for them.

Slovakia is among member states struggling to bring down their budget gaps estimated to be three times the government original target of 2,1 % of GDP and two times the EU rules allow. Government is trying to avoid changing 19 % flat tax and rised duties on alcohol products and hazard games but so far is not doing much to slash own spending and bring in further necessary reforms. Programmes announced so far call for symbolic steps such as halting purchases of cars and copying machines for ministries.

Country will probably not avoid the EU´s excessive-deficit procedure for breaching the ceiling. Slovak Finance Minister Jan Pociatek wants to “reshape the budget deficit to within European Union limits by 2012, but as SME daily informed, government will have to do it much quicker by 2011, otherwise it will face penalty or structural funds cuts.

In the second quarter Slovak economy recorded better than expected annual 5,3 % contraction what many economists consider as early signs of recovery and believe Slovakia  finally reached the bottom as Germany exits recession and orders are rising again. It also benefit from German “cash-for-clunkers scheme”. In august, economic sentiment indicator (IES) rose the third time in a row to 73,2 percentage point. In may it reached historical low – 66,3 points.

But the end of crisis is far ahead especially when looking on worsening situation on labour  market. Analysts still expect big job losses especially when government’s stimulus expires. In July Ministry of Labor and Social Affaires registered 12,07 % unemployment, more than 300,000 people were without work.