Central and eastern Europe see EU halo effect
| Pages | 325-334 |
Page 325
The IMF has just completed a regional outlook for the EU's new and prospective members from central and eastern Europe (CEE-10). The analysis shows strong growth, low inflation, and large current account deficits. The CEE-10 are also paying less on their external debt than other comparable emerging markets. In an interview, Susan Schadler, Deputy Director of the IMF's European Department, discusses the prospects for these countries.
Page 331
In May 2004, the European Union (EU) undertook its most significant enlargement to date, accepting Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia as new members. With the recent announcement that Bulgaria and Romania will join in 2007, the EU will soon comprise no fewer than 27 states. Apart from Cyprus and Malta, all the new members are located in central and eastern Europe (CEE-10).
Two years on, what is the verdict on EU membership for those eight countries in central and eastern Europe that joined in 2004? And what is the outlook for Bulgaria and Romania? The IMF's European Department has just completed a Regional Economic Outlook for the CEE-10 (see growth table). As part of this undertaking, IMF staff compared recent economic performance and financial market developments in the CEE-10 with other emerging market countries (see Charts 1-6).
Economic performance has been strong in the new EU members. But these generally low-saving countries are relying heavily on capital inflows to finance high levels of investment. This produces large current account deficits-in contrast with most other emerging market countries. Current account deficits usually raise red flags, but financial markets generally seem impressed by the performance of the CEE-10: the IMF's analysis shows that many of the CEE-10 are paying, on average, 50-100 basis points less on their external debt than other emerging markets with comparable policies and economic conditions. This indicates there may be an "EU halo effect"-EU membership and the expectation that the CEE-10 will eventually adopt the euro reduces the perceived investment risk. Camilla Andersen of the IMF Survey spoke with Susan Schadler, a Deputy Director of the IMF's European Department, about these and other findings.
[ GRAPHICS ARE NOT INCLUDED ]
IMF Survey: What has EU membership meant for the eight countries from central and eastern Europe [CEE-8] that joined in 2004?
Schadler: We are still in the early days of assessing the impact of EU membership, but signs are that there has been a considerable boost to growth. The CEE-8 have, on average, increased their per capita GDP growth from just below 5 percent in the years prior to membership to about 6 percent now. In some countries, it is much higher. Membership has brought major opportunities, most obviously in the form of transfers, comprising both investment and income support from the EU. On a more general level, it has made these countries more attractive as bases for offshoring and outsourcing from the 15 original members of the EU [EU-15]. Most of the CEE-8 are also experiencing rapid export growth and strong export penetration into the EU-15.
IMF Survey: When to adopt the euro is a burning issue for the new members. Some remain keen on joining the euro...
To continue reading
Request your trial