CENTROPE and the global financial crisis

Coming back strong? – CENTROPE and the global financial crisis

From EU enlargement in 2004 onwards, the economies of the CENTROPE region had seen strong economic growth accompanied by a constantly improving labour market situation. Most notably, the CENTROPE sub-regions in the Czech Republic, Hungary and Slovakia experienced spectacular catching-up processes marked, among other things, by a steady rise in employment rates. This trend, however, was abruptly curtailed by the global financial crisis starting in autumn 2008, as all of the CENTROPE countries were severely hit by the following economic turbulences.

Hungary was affected worst by slowing to virtually zero growth in 2008 and experiencing a 6.7% GDP contraction in 2009. But the Czech Republic, Slovakia and Austria likewise saw negative growth rates. Naturally, the labour markets were not left unaffected by these economic developments. Unemployment rates increased throughout the region, reaching 10% in the Czech Republic, 12% in Hungary and about 14% in Slovakia. Starting from a lower initial level, unemployment rates in Austria could be kept close to 5% so far. To a degree, the CENTROPE sub-regions present different patterns than the national level, with the Bratislava region keeping its unemployment rate to about 4%, while Vienna and South Moravia experience unemployment rates above their respective national average.

No meltdown but signs of recovery ...

Immediately after the onset of the global financial and economic crisis, the forecasts for the Central European economies were rather bleak, since experts feared extensive capital flight and severe problems for Austrian banks and insurances with large investments in Central and Eastern Europe. Fortunately, though, things unfolded differently, as the high level of economic integration prevented an exodus of capital, a standby loan by the International Monetary Fund (IMF) strengthened the struggling Hungarian economy and national stimulus packages, further supplemented by anti-cyclical economic policies at the regional level, stabilised market demand. For example, Vienna is investing an additional € 700 million in infrastructure and economy.

The positive effects of these measures were clearly demonstrated by GDP developments in the first quarter of 2010. With a growth of 4.6% compared to the first quarter of 2009, the Slovak economy was the “growth engine” of Eastern Central Europe. Commenting on its strong economic performance, BusinessWeek magazine called Slovakia an island of relative calm in troubled times. But the Czech Republic and Austria, too, recorded at least modest growth rates at the beginning of this year, while Hungary accomplished a turnaround by stopping the GDP decline of the past months.

... yet risks remain

Of course, this does not mean that everything is fine. As global and European economies are still in shaky conditions, serious risks remain. Since all CENTROPE countries are relatively small, open and export-oriented economies, much will depend on the economic performance of the big European “players” and especially Germany. Projected growth rates in the region’s primary export markets are still tepid and to a certain extent dependent on fiscal/monetary stimulus programmes, whose effects might soon dissipate. Furthermore, despite the return of (modest) economic growth, experts predict a continuous rise in unemployment in the region at least until 2012.

The tasks ahead for CENTROPE

Against this background, Peter Havlik of the Vienna Institute for International Economic Studies noted in a comment on the situation throughout the CEE countries that “the worst is over, but unfortunately also the best”. However, the CENTROPE region has specific assets and the capacity to develop appropriate tools to develop strongly and sustainably over the coming years, despite more difficult framework conditions. To do so, it will have to tackle current shortcomings in the field of research and education, and it will have to develop specific regional tools to overcome present-day problems in the labour market, such as the comparatively low activity rate of older workers, the growth in youth unemployment as well as long-term unemployment. With a strong focus on human resources as well as on research and education, CENTROPE Capacity will do its part to strengthen the region’s growth opportunities and its competitiveness.