Growth potential of CEE and SEE halved in crisis decade, says IMF official

Growth potential of CEE and SEE halved in crisis decade, says IMF official
Despite the challenging horizon, Poul Thomson told delegates: "While I have emphasized the headwinds, let me end by stressing that I have no doubt that the countries in the region will ultimately succeed."
By bne IntelliNews July 13, 2017

Increasing economic stresses threaten to undo some of the political progress made in Emerging Europe since the collapse of communism, a top International Monetary Fund official said on July 11.

Poul Thomsen, head of the IMF European Department, told an IMF conference in Dubrovnik, Croatia, that the economic growth potential of Central and Eastern Europe (CEE) and Southeastern Europe (SEE) has halved in the past decade and rapid outflows of skilled workers are adding to the dilemma.

Europe has struggled through a decade of crisis and economic malaise, causing convergence between core Western countries and the Eastern periphery to slow or stop, raising questions about the validity of painful economic and political reform and causing some governments to even question how worthwhile European integration really is, Thomsen told the conference, entitled “Reaccelerating Convergence in Central Eastern and Southeastern Europe.”

In an address posted on the IMF website, Thomsen, a Danish economist, added: "This is a timely reminder to all of us not to fool ourselves into believing that governance and institutional progress are inevitable; not to believe that such progress is an unstoppable outcome, a steady evolution. It is not… Going forward, headwinds will grow stronger."

Apart from Turkey, Thomson observed, the Emerging Europe region is ageing fast. “In addition, strong emigration, especially of skilled workers, is set to continue. In the past 25 years, some 20 million people left the region: that’s 5.5% of the population and most of them were young and well-educated. Empirical analysis that we have done at the fund suggests that already by 2012, real GDP would have been 7% higher on average in the region in the absence of emigration,” he added.

The world economy is finally picking up steam, but medium-term growth prospects remain subdued and uncertainty high, he cautioned. “Crucially important for the region, we project that potential growth in the Euro Area — the major trading partner for the region — to be some 20% below what it was before the crisis,” he said.

Thomsen also pondered to “what extent is the political turmoil that we have seen producing significant changes, not least in the US and the UK, and considerable apprehension and anxiety elsewhere also affecting the countries in Central and Eastern Europe? Is mobilisation of broad political support for reforms more difficult today than it was?”

He added: “At the beginning of transition, there was a natural momentum and appetite for change and reform. With so many policy-makers around the table, one issue that we are particularly interested to hear […] views on is the political economy of reforms. Is it getting harder?”

Thomsen also raised the point that the fund has become increasingly concerned about maintaining central bank independence in several countries in the region. “Central bank independence is an area where the region made early and significant progress, and it would be a major setback if we were to see backtracking in this area. This is a timely reminder not to fool ourselves into believing that governance and institutional progress are inevitable — that such progress is an unstoppable outcome of steady evolution,” he said.