After holding up well in early 2008, growth slowed markedly in Europe, mainly owing to the ongoing impact of external shocks. Inflation rose to levels not seen in a decade, but with commodity prices stabilizing and the prospect of very weak activity, inflationary pressures are expected to recede. Advanced economies have been hit by extraordinary financial stress whose alleviation has become the overriding policy concern. For most emerging economies, where resource pressures continue even though growth is moderating, the principal challenges are to bring inflation under control and address external imbalances. Meanwhile, contingency plans need to be prepared to deal with possible financial instability.
For the countries of central Europe—the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia—this is the Accession decade. By contrast with the uncharted waters of transition in the 1990s, the approaches to European Union (EU) membership—and beyond that the euro—are, in many respects, mapped out in advance. And the prospect of EU membership, from the early days of transition, has served as a policy anchor, helping to catalyze and sustain coalitions for reform. But policymakers face continuing challenges as they frame macroeconomic and financial sector policies during the run-up to accession and, in due course, monetary union. These challenges are the subject of the studies presented here.
The principle of an EU enlargement toward central and eastern Europe was first announced at the European Council meeting of Copenhagen in June 1993. This committed the European Union to admitting countries that had signed association agreements with it.2 Also of considerable significance, the European Council established the so-called Copenhagen criteria for EU accession. These criteria represented an understanding that central and eastern European countries would be admitted to the European Union once they had met certain conditions. This criteria established a number of benchmarks for assessing their progress toward economic and political compatibility with the EU.
The surge in commodity prices has boosted headline inflation across Europe. Analysis in this chapter focuses on the risks to inflation. Though some rigidities remain, improved labor market flexibility, the weakening economy, and strong monetary policy credibility should help limit second-round effects in the advanced economies. The risks of spillovers of price pressures to a broad range of consumption goods are greater in the emerging economies, where food and fuel account for a substantial share of consumption.
2.1 The results of the 2001 SIMSDI update show that there have been marked improvements in both the availability of FDI statistics, particularly position data, and in the application of a number of the recommendations of the international standards for compilation of FDI statistics. However, there are still areas where the majority of countries do not yet follow the international standards. Box 2.1 summarizes (1) the areas where there have been marked improvements since 1997; (2) the areas where more than 75 percent of the 61 countries that participated in the 2001 update now follow the international standards applicable to their economies at present; and (3) areas where, despite improvements, the majority of the 61 countries do not yet follow the international recommendations.
Mr. Peter Doyle, Mr. Guorong Jiang, and Louis Kuijs
For transition countries in the process of joining the EU, the prospects for the real sector will be critical in determining the appropriate policy frameworks both before and after accession. This chapter discusses the key factors likely to shape the nature and pace of growth in five of these countries in central and eastern Europe that form the focus of this book: Poland, the Czech Republic, the Slovak Republic, Hungary, and Slovenia—known collectively as the CEC5.
Differences in country-specific financing conditions may account for a dispersion of responses to a turnaround in the credit cycle across Europe. Moreover, by reinforcing the role of financial assets as borrowing collaterals, developments in national housing and corporate finance systems have the potential to make bank lending procyclical. In this way, the financial sector can amplify business cycle fluctuations as well as the impact of monetary policy shocks and asset price movements on real activity. Cross-border ownership of assets further bolsters this mechanism. By affecting the behavior of banks’ capital buffers over the cycle, banking regulation might have some role to play in mitigating procyclical swings in domestic credit conditions and, thereby, in lessening macroeconomic volatility.