Europe Revision: Problems facing Eastern European Countries

Revision notes on some of the economic challenges facing new member states of the EU

Economic difficulties facing eastern European members of the EU

1. Deep recession –
a. First major downturn since the post-communist chaos of the early 1990s
b. The worst-affected countries are dependent on the Euro Area for investment and exports e.g. in 2007 Czech Republic sent 52.6% of X to the EU-27, 50.4% in Hungary and 53.5% in Poland.
c. Good example is the collapse in production in the European car industry
2. Rising unemployment added to by the return of migrants
3. Huge government debts - fuelled by the recession but also by longer term factors such as an ageing population
4. Asset price deflation after property bubbles burst e.g. Latvia, Estonia
5. Many of their currencies are depreciating - making it harder to service debt issued in Euros - Some currencies have come under speculative attack
6. Some countries have currencies pegged to the Euro – which makes them highly uncompetitive and is costing many jobs
7. Banking system suffering from high level of bad debts - many western Banks are heavily exposed – is this Europe’s own sub-prime crisis?
8. Loss of investor confidence in central and eastern Europe – some reversal of FDI flows – which have been a major source of growth over recent years

Implications for the UK economy
1. In the short term – a fall in exports – negative multiplier & accelerator effects
2. Some UK firms will cut back on their FDI into central and Eastern Europe
3. Recession may limit extent to which eastern European migrants head back home

Evaluation points
1. Long term process of convergence with Western Europe was never going to be smooth – the key is how the new EU members respond to the challenge especially on the supply-side of their economies
2. Some new EU members suffered from unsustainable booms (e.g. the Baltic States) but the same happened in Spain and Ireland and they have much higher levels of private sector debt
3. Several countries including Poland, the Czech Republic, Slovakia and Slovenia are out-performing the UK and others during the international crisis
4. Eastern European region’s medium term key competitive advantages remain – especially low-cost high-skill labour – attractive to manufacturing businesses
5. The 2009 crisis may persuade CEEC countries to reduce their dependence on foreign direct investments, foreign borrowing and additional funds from Brussels and build an economic growth model on different grounds