The Report recommends, firstly, that governments, central banks and financial supervisory authorities across EU11 countries need to shore up confidence of financial markets. Monetary policy should remain stable to buffer EU11 against external shocks and help the economy defend against Euro area volatility. Polices should be in place to ensure access to credit for viable borrowers and to support growth of emerging sectors, despite the ongoing deleveraging.
Secondly, the EU11 governments must decide how much, how fast, and in what ways they want to consolidate public finances, so that their fiscal positions do not become the source for financial market volatility. In designing the composition of fiscal consolidation, governments need to account for the fragility of the economic outlook and try to limit the negative impact of fiscal consolidation on growth.
Finally, the report stresses that structural policies, in support of growth, can help overcome the financial, labor and fiscal challenges. By removing barriers to growth in product and labor markets, the EU11 countries can increase their potential economic gains in the medium term. Closing the existing institutional and structural gaps with the rest of the EU will soften the constraints imposed by demographic threats and speed up income convergence with the EU15. Thus, providing incentives for labor mobility, making public finances more sustainable, adapting social security systems to demographic developments and harmonizing regulation across borders are key reform priorities for EU11.
Despite a volatile external environment, the EU11 countries did well in 2011. Overall economic growth strengthened to above 3 percent and the region as a whole recovered its output losses from the global financial crisis. In addition, fiscal measures delivered a reduction of around 3 percent of GDP in the EU11 average fiscal deficit. The financial sector showed resilience to renewed concerns about fragile European sovereigns. Estonia, Lithuania, Latvia and Poland grew by more than 4 percent. After two years of negative growth, Romania’s GDP expanded by 2.5 percent, helped by a strong increase in industrial and agricultural production. Growth in Bulgaria, the Czech Republic and Hungary was at around 2 percent, while Croatia and Slovenia recorded around 0 percent growth. However, the good performance conceals important shifts in economic sentiment that occurred during the year. As the region started to feel the impact of lingering concerns about the European sovereign-debt markets, creeping oil prices and the global slowdown, towards the end of 2011, the growth momentum slowed down. With the downward trend in economic activity, labor markets remained slack. Unemployment rates hovered around those recorded in the midst of the financial crisis with sluggish employment growth.
“Now in mid-2012, three and a half years after the global financial crisis broke, EU11 countries are yet again faced with serious external shocks and weaker prospects than six months ago,” said Gallina Andronova Vincelette, Senior Economist in the World Bank’s Europe and Central Asia region and lead author of the report. “In this volatile environment, the economic growth in EU11 countries is set to decline from the 2011 levels to 1.5 percent in 2012, with all EU11 countries growing slower than a year before and three countries slipping into recession. However, given the heightened uncertainty, even this projected modest growth assumes that policies will be adopted in the Euro area to successfully avoid a serious deterioration in international financial market conditions,” said Vincelette.
