Front Matter

Front Matter

International Monetary Fund. European Dept.
Published Date:
May 2016
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Regional Economic Issues

May 2016

Central, Eastern, and Southeastern Europe

How to Get Back on the Fast Track

Country Coverage and Codes

Central, Eastern, and Southeastern Europe (CESEE) refers to Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Kosovo, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Turkey, and Ukraine.

The following country codes, national flag markers, and regional aggregates are used in the report:

Baltic countries (Baltics) (shown in light blue): Estonia (EST

), Latvia (LVA
), Lithuania (LTU

Central and Eastern Europe (CEE) (shown in blue): Czech Republic (CZE

), Hungary (HUN
), Poland (POL
), Slovak Republic (SVK
), Slovenia (SVN

Commonwealth of Independent States (CIS) (shown in yellow): Belarus (BLR

), Moldova (MDA
), Russian Federation (RUS
, also in red when shown separately), Ukraine (UKR

Southeastern European EU member states (SEE EU) (shown in green): Bulgaria (BGR

), Croatia (HRV
), Romania (ROU

Southeastern European non-EU member states (SEE non-EU or Western Balkans) (shown in light green): Albania (ALB

), Bosnia and Herzegovina (BIH
), Kosovo (UVK
), FYR Macedonia (MKD
), Montenegro (MNE
), Serbia (SRB

Turkey (TUR

) is shown in black.

Averages are weighted by the PPP GDP weights of countries in sub-groups in 2014.

CESEE: Mapping of Country Groups*

*/ The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. In this report, statistical data on Crimea and the City of Sevastopol are included as part of the data for the Russian Federation.

Executive Summary

How to Get Back on the Fast Track

Despite weaker external demand, most of the region outside the Commonwealth of Independent States (CIS) continues to record solid growth, with unemployment rates now approaching precrisis levels.

May 6, 2016

  • Robust growth continues in most Central and Southeastern European economies as well as in Turkey. Accommodative macroeconomic policies, improving financial intermediation, and rising real wages have been behind the region’s mostly consumption-driven rebound, while private investment remained subdued. In the near-term, strong domestic demand is expected to continue supporting growth amid continued low or negative inflation. In 2016, CESEE countries outside the CIS are expected to grow by around 3 to 4 percent.

  • In contrast, the Russian economy went through a sharp contraction last year amid plunging oil prices and sanctions. Other CIS countries were hurt by domestic political and financial woes, as well as by weak demand from Russia. In 2016, output contraction is projected to moderate to around 1½ percent from 4¼ percent in 2015 as the shocks that hit the CIS economies gradually reverberate less and activity stabilizes.

Downside risks have increased since the fall of 2015. Although sources of downside risks remain largely unchanged, these risks have become more pronounced. Lower euro area and U.S. growth, tighter global financial conditions, and continued weakness in many emerging economies are creating headwinds. In addition, political uncertainty and instability risks have been on the rise across the region.

As CESEE is now heading into choppy waters, policies should remain supportive. In the baseline, a combination of supportive monetary policy and medium-term fiscal consolidation remains valid for many economies in the region. In the event of a negative growth shock, monetary policy should be the first line of defense, while automatic fiscal stabilizers should be allowed to operate freely, provided there is room to do so. In case of a major shock and depending on the source of the shock, fiscal policy should ease within medium-term adjustment plans that dispel concerns about sustainability. Medium-term fiscal consolidation should rely, as much as possible, on growth-friendly revenue and expenditure measures, such as improving tax compliance, introducing carbon and property taxes, better targeting of transfers and entitlement programs, while protecting productive spending on public investment.

Despite the strong cyclical rebound, growth in CESEE remains well below the precrisis level and the region is facing considerable challenges over the medium-term. If lower potential growth turns out to be the “new normal”, this would imply a much slower pace of income convergence with advanced Europe. From 1990 to 2008, CESEE countries made significant progress along the convergence path on the back of strong total factor productivity (TFP) growth and, to a lesser extent, capital accumulation. After the crisis, TFP growth slowed significantly across most advanced and emerging economies, including CESEE. Some of the factors that may have boosted TFP growth in CESEE before the crisis, such as potential growth in advanced Europe, or expansion of global trade and supply chains, appear to have stalled or gone into reverse after the crisis. In addition, CESEE countries are facing some of the worst declines in the working-age population in Europe, reflecting both unfavorable demographics and emigration—a trend that is expected to continue or worsen.

How Can CESEE Countries Get Back on the Fast Convergence Path?

With a less supportive global environment over the medium-term, greater reform efforts to increase productivity, support further capital deepening, and improve labor supply may be needed to lift growth and re-accelerate convergence. The reforms could be directed toward:

  • Improving the labor supply: Unfavorable demographics and emigration increase the importance of active labor market policies. The analysis in this report shows that CESEE countries have some scope to counter the decline in the working-age population by increasing participation rates (women and seniors), reducing structural unemployment and skill mismatches, and raising life expectancy. For example, increasing female labor force participation could help support growth in Southeastern Europe (SEE) and Turkey.

  • Boosting investment: Capital stock per capita in a typical CESEE economy is still about a third of that in advanced Europe. Investment gaps are particularly wide in infrastructure, where public investment could help, but on its own would not be enough. While investment may be held back by the crisis legacies – high debt burdens and nonperforming loans – and a highly uncertain outlook for global growth, most CESEE countries need to address deeper structural issues in order to boost private investment. In most of the region, domestic savings rates are lower than those required to sustain investment rates high enough to close the income gaps with advanced Europe within a generation or so and without hitting external debt sustainability limits. Policies should therefore focus on institutional reforms that reduce inefficiencies and increase returns on private investment and savings.

  • Raising productivity: In order to maintain higher TFP growth rates than in advanced Europe, CESEE countries may have to address structural and institutional obstacles that prevent efficient use of available technologies, or lead to inefficient allocation of resources. While it is hard to estimate precisely the quantitative impact of structural reforms on productivity and growth, the analysis in this report suggests the largest efficiency gains are likely to come from improving the quality of institutions (protection of property rights, legal systems, and healthcare), increasing the affordability of financial services (especially for small but productive firms), and improving government efficiency.

Approved by

Poul M. Thomsen

Prepared by a staff team consisting of Dilyana Dimova, Plamen Iossifov, Gil Mehrez, Jiri Podpiera, Faezeh Raei, Ara Stepanyan, Yan Sun and Jiae Yoo, with inputs from country teams and research assistance by Tiberiu Scutaru and Xuan Tu. The team was led by Anna Ilyina and Jesmin Rahman, under the general guidance of Jörg Decressin. Administrative support was provided by Gilda Ordoñez-Baric.


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