CEE Economies in the New Millennium: Their Strengths, Vulnerabilities and Forthcoming Challenges

After completing the painful transition of the 1990s, former communist countries enjoyed a period of rapid economic growth which was underpinned by three groups of factors: (i) benefits of market reforms and transition-related restructuring in the 1990s; (ii) increasing participation in the Single European Market (SEM) and other mechanisms of EU integration; (iii) global economic and financial boom of 2003–2007. However, the period of prosperity did not last long. Since 2008 the entire region has become hit by the global and European financial crises, the negative consequences of which have not yet been overcome. While the size of negative shock and resulting macroeconomic performance differed between individual countries, the crisis revealed common vulnerabilities such as high dependence on economic developments in advanced economies of Western and Northern Europe, and changes in global capital flows determined, in turn, by changes in monetary policies of major central banks, limited room for manoeuvre in national macroeconomic policies, unfinished domestic economic reform agenda and others. The after-crisis macroeconomic prospects look uncertain and challenging. The pace of economic growth is unlikely to come back to the high levels of the early and mid–2000s soon. That means CEE countries will have to live and conduct their macroeconomic policies in the environment of slower growth, which will have a considerable impact on their fiscal accounts. Another challenge is related to population aging, which will have serious consequences for sustainability of public pension systems (already in deep deficit), public healthcare systems, labour market, migration flows, etc. Rapid development of non-EU emerging-market economies and their closer trade relations with the EU will put increasing competitive pressure on several sectors and industries of CEE economies, including those which were considered to be their comparative advantage in the previous decade. Countries most heavily hit by the crisis made some adjustment, but more concerted reform effort in the entire region is needed to increase growth potential. The future reform agenda should decrease implicit public pension and health liabilities, make domestic labour markets more flexible, improve business climate, and adjust education to the needs of contemporary labour markets. Countries which stay outside the Eurozone should join it soon. Completing the Single European Market mechanism (especially in services), simplifying acquis wherever it is possible (pan-European deregulation), going ahead with the Banking Union project, strengthening fiscal surveillance rules, and more open migration policies, can contribute to improving future growth potential of all EU economies.