I shall try to deal with three basic questions (1) :

• How have these countries fared in 2000/2001 ?
  
• How are they likely to be affected by the slowdown of the macroeconomic environment and by the uncertainty of financial markets ?
  
• What are their prospects for EU accession ?

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I. HOW HAVE THESE COUNTRIES FARED IN 2000/2001 ?

1. Growth has been satisfactory over the last two years in Central and Eastern Europe :

As the appended Tables show, growth in the region reached on average 4 % in 2000 (vs. less than 2,5 % in 1999). This was achieved despite a slight slowdown in Poland and Slovenia, but helped by a stronger momentum in the Czech Republic. This rate of growth of 4 % exceeded the EU average of 3.3 %, which is good news in terms of the catching up process.

Exports were an important factor in those results, the region benefiting from the strength of the EU economy. However, from the spring of 2001, export growth to the EU began to slowdown and this trend is likely to continue. Nonetheless, the estimates for the region's GDP growth in 2001 are still relatively good with an average around 3 % (this is significantly better than growth in the EU which is forecast at 1,5 % in 2001).

This positive outturn means that growth in the region is becoming increasingly dependant on domestic demand (upswing in investment in the Czech Republic, fiscal stimulus package in Hungary, but growth reducing in Poland where monetary conditions remain tight).

2. Inflationary performance is converging :

Inflation performance varies from country to country, with Poland, Hungary and Slovenia at 9-10 % in 2000. In the Czech Republic and the Baltic States, results were more favorable (2 to 3 %). Oil prices and the strength of the dollar against the euro explain part of the persistence of inflation in the first group of countries. It is also notable that monetary policy in Poland contributed to curbing inflation in mid-2000 and that prospects for 2001 and 2002 are relatively good (5,6 and 3,8 % respectively). In contrast, inflation is rising somewhat in the Baltic States and in the Slovak Republic due to the acceleration of domestic growth.

On the whole, some convergence of inflation in the region is at work at controllable levels.

3. Fiscal behavior is under some pressure :

With external demand slowing, pressure on fiscal balances is likely to increase. Furthermore, approaching elections in a number of countries (Czech Republic, Hungary, Slovak Republic) make governments less inclined to decide on expenditure cuts.

The structural causes of these fiscal deficits must be addressed in the medium run. The reform of the State, the restructuring of a number of loss making public enterprises, tax reform and the overhaul of the pensions systems are indeed inescapable. Therefore, there are no margins of maneuver to use fiscal measures to stimulate the economy.

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II. HOW ARE THESE COUNTRIES LIKELY TO BE AFFECTED BY THE SLOWDOWN OF THE MACROECONOMIC ENVIRONMENT AND BY THE VOLATILITY OF FINANCIAL MARKETS ?

1. The slowdown in growth raises significant challenges :

If the EU economy continues to slowdown (its growth rate is forecast at less than 1 % in 2002), several challenges must be faced.

A weaker EU economy will likely dampen prospects for exports and FDI. Therefore, a more protracted slowdown of EU demand would exert a negative impact on the regions' growth rate. Forecasts by the EBRD for growth in the region for 2002 are now at around 2,5 % (instead of 4 % and 3 % respectively in 2000 and 2001).

But even a growth rate of 2,5 % is not without raising challenges

On the one side, a less export oriented growth will tend to increase external imbalances. As the appended tables show, with the exception of Hungary and Slovenia, all countries are running current account deficits higher than 5 % of GDP. These figures are not sustainable over the long run.

On the other side, a weaker external environment will tend to dampen FDI. Actually, the EBRD forecasts for FDI in the region show a reduction of some 2 billion dollars in 2002 v.s. 2001.

All this means that the region is significantly dependant on external financing and especially on that form of financing that carries no debt service i.e. FDI.

It is therefore all the more important for these countries, in order to attract foreign investment, to maintain fiscal and monetary discipline and to advance structural reforms which are so important to establish an attractive climate for investment. The transition economies have indeed an "an opportunity to attract projects involving the relocation of facilities within Europe as a means of lowering costs of production" (EBRD - Transition Report 2001).

2. The volatility of financial markets have up to now left Central and Eastern European countries largely immune :

It is remarkable to note that the region has been increasingly disconnected from the volatility and liquidity scarcities of the financial markets that have affected a number of emerging countries over the last years.

After the liquidity crunch following the Russian crisis en 1998, yield spreads have significantly and persistently come down over the last three years. The outburst of the Argentine crisis over the last six months (which has affected to some degree the situation in Brazil) has had no visible effect on the situation of Central and Eastern Europe.

The appended charts show vividly how spreads have been reducing and converging in Central and Eastern Europe and how the regime is disconnected from Latin America.

This is consistent with the still relatively moderate indebtedness ratios (external debt service as a percentage of foreign earnings) of Central and Eastern European countries (10 to 20 %) compared to figures of 70 % or more in countries like Argentina or Brazil.

This is also a manifestation of the convergence factor from which the EU candidates are benefiting.

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III. WHAT ARE THE PROSPECTS FOR EU ACCESSION ?

1. The framework for accession is now clearer.

The present members of the European Union have decided at the Göteberg's summit in 2001 that a first wave of accession should in principle be possible by 2004.

Indeed, EU members seem to have opted for groupings of applicant countries instead of individual membership. Recently, in Leaken, members have declared that the first wave would normally include all candidates except Bulgaria and Romania which are still far behind. At the summit of Nice, a year ago, the European institutional framework has been adapted to accommodate the newcomers. Thus the reweighting of the votes in the Council of Ministers now covers the new applicants (Poland in particular has been recognized the same voting rights as Spain in view of their identical populations).

But much still remains to be done both on the side of the present EU members and on the side of the applicants.

As far as the present EU members are concerned, they still have to agree on :

• a meaningful reform of the EU institutions in order to make a Union of more than 25 members workable (this covers, in particular, the issues of majority votes and of the number of Commissionnars) ;
  
  
• a resolution of the budgetary impact of the accession. Presently, the agreement is that, until 2006, accession should not increase the maximum percentage of resources allocated to the Union (1,27 % of total EU GDP). This principle would, if strictly applied after 2006, raise difficult problems regarding : common agricultural policy (2), regional and structural aids. It is clear that these major problems will have to be tackled after the French and German elections in 2002, that is in the last quarter of 2002.

On the side of the applicant countries, much still remains to be done in terms of structural reforms. Let me deal with this in a special paragraph that features the main findings of the latest Commission Report issued last December.

2. Bilateral negotiations with the candidates have continued to progress over the year 2001 :

Poland :

• This functioning market economy must intensify its present reform efforts in order to be able to cope with competitive pressures ;
  
• Fiscal adjustment must take place in order to reach a viable position and to contribute to a more suitable policy mix ; structural reforms of the State sector are yet to be completed ;
  
• Speeding up privatization and restructuring in key sectors, like steel and agriculture, are of the essence.

Hungary :

• The country continued to make progress in implementing the "acquis" communautaire ;
  
• The macroeconomic situation continues to be sound, however fiscal policy has became expansive whilst the uncertainties over the further reform of the pension system and the delays in the reform of the health care system are raising some concerns ;
  
• Many structural reforms are in progress (independance of Central Bank, financial system, environment…).

Czech Republic :

• Macroeconomic performance has improved ;
  
• Progress has been made in restructuring banks ;
  
• However the current account deficit has widened and the budget deficit has considerably risen. Medium term sustainability is yet to be assured ;
  
• Large segments of the national legislation are in line with the "acquis", but the enforcement capabilities should be strengthened in some areas ;
  
• Progress must be made in telecommunications, railways, taxation,….

Slovenia :

• Macroeconomic developments continue to be favorable ;
  
• However persistent inflation (linked to widespread indexation) remains a concern ;
  
• Significant progress has been made in transposing the "acquis" in national legislation ;
  
• Very good progress has been made in the agriculture and transport areas ;
  
• Slovenia's administration capacity to implement legislation has been enhanced.

Slovakia :

• Significant progress has been achieved in reforming legislation ;
  
• Bank privatization is nearing completion, but bank supervision has to be further strengthened ;
  
• Overall macroeconomic stability has been maintained ;
  
• However, the substantial widening of the current account deficit will require a more prudent fiscal policy stance ;
  
• Administrative capabilities are still relatively weak.

Baltic States :

• The three States have made considerable progress towards meeting the accession priorities and transposing the "acquis" communautaire ;
  
• They have preserved macroeconomic stability but have to continue to be careful on fiscal discipline ;
  
• Current imbalances remain high.

Bulgaria :

• Further progress has been made on legislative reform (but Romas continue to suffer from widespread discrimination) ;
  
• The country has maintained, for four years, macroeconomic stability ; however inflation has risen considerably in 2000 ;
  
• Financial intermediation continues to be low and inefficient ;
  
• Administration obstacles to private sector development continue.

Romania :

• Romania has made some reform progress towards establishing a functioning market economy; although it would not, in the medium term, be able to cope with competitive and market forces ;
  
• The country has made progress towards a better macroeconomic setting, but economic imbalances with high inflation and a widening current account deficit still remain.

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This brief report shows that the applicant countries are all making progress towards their accession to the EU but that the situation remains uneven and that there is still a lot more to achieve.

More generally, structural progress and “convergence” among the “most advanced” Central and European countries are remarkable. Those economies are clearly getting closely anchored to the European Union in terms of trade, investment and legal frameworks.

Well before their formal accession, those countries are already forming a zone which capital markets, as I have tried to show, are recognizing as a “convergence area” rather than an “emerging market” group.

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Conclusion :

In conclusion, I should like to stress that the magnitude of the challenge for EU should be neither over nor underestimated.

“The accession of the ten applicants of the region would increase the population of the EU by more than one quarter and its surface area by around one third. But the “economic” size of the EU would increase by much less reflecting the much lower level of income and wealth in the accession countries : GDP on a purchasing-power-parity would increase by 11 %, while average GDP per capita would decline by 13 %.” (IMF World Economic Outlook 2000).

All of the Central and Eastern European countries have made progress but there still remains considerable differences between countries within the region. The “most advanced” of these countries (Czech Republic, Hungary, Poland, Slovenia and the Baltic States) began accession negotiations in 1998 and are now getting closer to EU countries on a number of indicators. On a PPP basis, the average per capita income of this first group (around 10 200 dollars) remains less than half of that of the EU (22 300 dollars). But things are changing. Slovenia, for example, has already a per capita income higher than the one of Greece, the poorest existing EU member.

With GDP rates of growth of 4 to 5 %, as we have seen earlier and with rising increases in productivity (especially in Poland and Hungary), the catching up process is moving ahead.

One should not forget that previous EU enlargements posed similar -albeit lesser- problems to the existing EU. Chart IX gives some interesting insights in this respect. The chart shows, for example, that, at least for the “most advanced” candidates, significant progress is being made in terms of GDP per capita, reduction of inflation, fiscal discipline and trade openness compared to previous enlargement experiences.

Notes :

(1) This presentation owes much to the EBRD Transition Report 2001. (retour)

(2)  The Commission has just proposed, for example, that farmers in the new member countries would have to wait ten years before receiving full direct aid. Poland -whose rural parties constitute a strong political force-considers such a transition period as too long. (retour)

Annexes :

Table 1 : Macroeconomic Achievements (atteindre)

Table 2 : Structural Reforms (atteindre)

Table 3 : Foreign Direct Investment (net inflows in Million US dollars) (atteindre)

Table 4 : Current Account Balances (in % of GDP) (atteindre)


Graph 1 : Spread Over US T. Bond in BPS (atteindre)

Graph 2 : Spread Over US T. Bond in BPS (atteindre)

Graph 3 : Spread Over US T. Bond in BPS (atteindre)

Graph 4 : Spread Over US T. Bond in BPS (atteindre)

Graph 5 : Where do they stand on the road of accession to the European Union ?  (atteindre)