Crisis Management in the EU and in Hungary

GKI Conference 26 March 2013

Alex Lehmann,

Lead Economist, EBRD

Key points

• Funding environment will remain challenging, not just from foreign banks but also in terms of FDI

• Eurozone growth environment of course as well. Cyclical recovery in CEE economies the weakest in transition history.

• Depressed investment volumes the key worry for trend growth medium term.

• Shift to domestic demand, and scaling up in technology content of exports

• Fiscal policy not an option; monetary easing now exhausted, greater exposure to international bond markets a much greater vulnerability

• Structural reforms hence the key tool for crisis management: credible, comprehensive and designed to illicit the investment response.

The short term outlook: a series of downward revisions

The pre-crisis boom: in good measure fuelled by domestic investment

Now: the weakest component in the recovery

Considerable variation between countries

FDI inflows sharply reduced compared to before the crisis

The pace of European bank deleveraging

External funding outflows only partially compensated by local deposit growth

Funding conditions improved, though credit standards continue to tighten

Structural reform priorities in the CEE: choice picks of OECD and EBRD

Slovak Republic: OECD

• Education system

• Labour force mobility and participation rates

• Reduce barriers to competition and entrepreneurship

• Innovation support framework

Poland: OECD

• Public ownership, product market competition

• Labour taxes and overly generous social support schemes

• Transport, communication and energy infrastructure

• Education system

Source: ‘Going for Growth’, OECD, 2013, and EBRD Transition Report, 2012.

… and EBRD

• Education system: skills shortages

• Private pension funds

• Private infrastructure funding/PPPs

… and EBRD

• PPPs

• Regulation to sustain banking sector integration

• Local capital market development

… and in Hungary

OECD

• Reduce taxes on labour

• Labour force participation, esp. at old age

• Education system, esp. tertiary

• Business regulation and competition, esp. network industries

• Public sector efficiency

Source: ‘Going for Growth’, OECD, 2013, and EBRD Transition Report, 2012.

… and EBRD

• Stable regulation and tax regime for banking sector

• Labour force participation

• Credible macroeconomic policies and outlook

Launching structural reforms in the midst of a recession?

• Involve all stakeholders

• Get buy in from financial sector to stimulate investment response

• Medium term programme and credible communications

• Design package to off-set individual elements: e.g. product market competition and labour market liberalisation