Economic Recovery Watch 19May 2010

Centre For European Studies
ECONOMIC RECOVERY WATCH

Last updated on 19/05/2010 To view full articles, click on hyperlinks.

CONTENTS
WATCHTOWER

EU MEMBER STATES

WORLDWIDE

INSTITUTIONS

EPP VIEWS

OUR COMPETITORS' VIEWS

FROM THE BLOGOSPHERE…

www.thinkingeurope.eu


“Watchtower”
The Euro Crisis: Is ‘More Europe’ the Answer?
Foreword by CES Head of Research

It was probably the best-known series of jokes in communist-ruled Central and Eastern Europe:
Questions to Radio Yerevan. The underlying principle was that a more or less serious listener’s
question was answered by: ‘In principle yes, but…’ – and what followed was a near total refutation of
the assumption contained in the question. One is tempted to react like Radio Yerevan to the question
whether more competences for the EU institutions are the proper answer to the Euro crisis: in
principle yes, but please let’s preserve democratic legitimacy, subsidiarity and diversity, let’s be
completely realistic about the ratification chances of any changes in the Lisbon Treaty, and above all
let’s not forget that the root cause of this crisis is not deficit and debt in Greece and other Southern
Member States, or evil speculators, for that matter, but sluggish growth, inflexible labour markets,
bureaucracy and high taxes all over the EU – only more so in the South.

That means that, of course, the European Commission should indeed develop an early warning system
on national deficits. And of course it means that the Stability and Growth Pact’s teeth ought to be
sharpened – while being conscious of German and French sins, too, in waiving the criteria when the
going got tough. And it certainly means more macro-economic coordination in the Council. If that is
what is meant by better economic governance, then better it would be folly to reject it. But an EU
economic government, with the Commission actually determining national budgets and even macro-
economic policies, would not only fail in the ratification process – it would also be undesirable because
instead of tackling the root causes of the crisis, it would exacerbate them. The EU has three years to
meet the gravest challenge to date, to its currency and to its cohesion. Let’s not waste them on
questions to Radio Yerevan.




EU Member States
Austria
Austrian People’s Party (ÖVP) Economy Minister Reinhold Mitterlehner has said that the depreciation
of the Euro against the dollar in the wake of the Greek financial crisis was not totally bad: ‘Even
though the Greek debt crisis has become a threat to Europe, the weak Euro will give exports additional
tailwind.’ He added that it was important for Austria to increase exports and prevent consumption
from declining. Regarding the impact of the Greek crisis on the Austrian economy, it has emerged that
Greece is deeply in debt with Austrian banks: the Bank for International Settlements (BIS), which
coordinates regulations in the field of financial services to promote international financial stability, has
revealed that Greece owes Austrian banks around €4.5 billion. Nevertheless, the Austrian banks have
ensured they would not reduce investments, as declared by the Raiffeisenzentralbank (RZB) boss
Walter Rothensteiner after a meeting with the heads of Austria’s other four major banks and the
Austrian Finance Minister. RZB has later praised the €750 billion stabilisation package for Eurozone
countries in financial difficulty, saying that the package agreed by the finance ministers in Brussels
should suffice to stop the spreading of financial infection in the Eurozone and ensure the refinancing
of countries in trouble. This positive reaction is mirrored by public opinion, with 81 per cent of
Austrians supporting EU financial assistance for Greece, according to results of a new poll by the
Klagenfurt Human Institute. On a different topic, new figures show that the Austrian economy failed
to grow in the first quarter of 2010 compared to the last quarter of 2009, according to the Institute for
Economic Research (Wifo). More optimistic forecasts released by Bank Austria are predicting a growth
spurt in the second quarter in the country, thanks in part to more optimism in the industry and among
consumers.

Belgium
Economists have expressed concern that political paralysis in Belgium as it recovers from the global
economic crisis would harm the prospects of reducing the country’s budget deficit. ‘Until now we may
say that Belgium was off the radar screen of the financial markets, but this political crisis could bring
Belgium back on to the radar screen of those shorting debt markets, speculators or otherwise,’ said
Etienne de Callatay, economist at Bank Degroof in Brussels, referring to the practice of trying to profit
from a decline in an asset's value. Leterme's nine-month struggle to form his first government fuelled
concerns in the media at the time that Belgium could break apart and raised the risk premium
investors demanded to hold government bonds. In the banking sector, Franco-Belgian financial
services group Dexia SA reported a higher than expected first-quarter net profit, boosted by a one-
off capital gain, and revealed its exposure to Greece. The company, kept afloat by a bailout and state
guarantees in late 2008, said in a statement that exposure to Greek sovereign debt was €3.7 billion,
with little to no exposure to Greek banking, local authorities and corporates. It added its insurance
companies had exposure to a further €1.2 billion of Greek sovereign debt, but this was less of an issue
for Dexia itself.




Bulgaria
According to a research of the Open Society and the World Bank, Bulgarian household income
declined by approximately 30 per cent and 21 per cent of Bulgarians live on the verge of poverty in
Bulgaria. Smaller income is said to be a result of job losses and reductions of salaries. Consequently
people try to limit their grocery, medical and educational expenses. Thirty per cent of Bulgarians save
on food and forty per cent on water and electricity. The most affected by the economic crisis is the
group of low-qualified people and Roma minority. The Bulgarian Minister of Labour and Social Policy
said that even though the situation is bad in other sectors, employment in tourism and agriculture has
increased. The country’s budget deficit reached 1.67 billion BGN in the first quarter of 2010 due to the
decrease in revenues and increased spending on social payments. Meanwhile, Bulgaria’s fiscal reserve
reached the level of 6.0 billion BGN at the end of April – first time since the beginning of the year
when revenues exceeded expenditures. The country is one of the seven EU member states that do not
meet all the conditions to adopt euro due to too large budget deficit. The European Commission set
these countries under the extensive deficit procedure that will ensure swift reduction of their state
spending. Bulgaria’s general government deficit reached 3.9 per cent in 2009 which exceeded the EU
limit for overspending by 0.9 per cent. The deficit exceeded also government estimations of 3 per
cent.

Cyprus
There were a few encouraging signs of recovery in an otherwise problematic Cypriot economy the past
few months. First was the Central Bank governor’s prediction that, after a small contraction of 1.9 per
cent in 2009, the economy would continue to shrink in 2010. The budget deficit rapidly increased to
6.1 per cent of GDP for 2009, industrial turnover for January 2010 fell by 5 per cent, while annual
inflation recorded a slight increase in April, to 2.44 per cent. Amidst these negative developments,
there existed some reasons for slight optimism. There seemed to be a rebound in the all important
tourism industry, as well as a slight moderation of the pace of industry decline and unemployment
rise. Whether these signs point to the beginning of a very slow recovery though, is unclear.

Czech Republic
The priority for Czech Social Democrats (CSSD), if the party wins the 28-29 May elections, is to save
money, perhaps 19 billion crowns a year, through a new reform on the system of public procurement.
Social Democrats said earlier they wanted to gain an additional 29 billion crowns through cost-saving
measures in the state budget. They want to save another 41 billion through changes in taxes and
dividends. For the Civic Democratic Party (ODS), the top priority is the lowering of the state debt. The
ODS promises the Czech Republic will have a balanced budget by 2017 if it rules the country. It wants
to reach the goal with the introduction of a ‘financial constitution’ that would anchor fiscal discipline
in legislation and cutting overhead costs of all ministries by 5 percent. This year, the Czech Republic´s
budget carries a large deficit of 163 billion crowns, or 5.3 percent of GDP. The ODS says it wants to
keep taxes and social insurance payments at the current level. On the contrary, the Social Democrats
(CSSD) want to introduce progressive taxation. The ODS counts with measures in support of



Last updated on 19/05/2010 To view full articles click on hyperlinks.

employment; it promises support to part-time jobs, work from home and employment of school
graduates and older people. The ODS pushes for a more targeted and stringent system of social
benefits and a pension reform to which all revenue from possible privatisation would go. The ODS
does not want to privatise teaching hospitals and health care insurance companies. This differs from
what some party representatives proposed in the past. The ODS wants to cut the number of ministries
by three to 15. On another note, Czech Prime Minister Jan Fischer has accepted the nominations for
European Bank for Reconstruction and Development (EBRD) vice president.

Denmark
The Danish people have been saving their money since the financial crisis started, but in March they
loosened their belts. Savings have been up 60 billion kroner since September 2008, seriously
hampering consumer spending. Statistics Denmark found a sharp jump in retail sales with 2.9 per cent,
but Danske Bank chief Economist Steen Bocian said that we should not count on the same kind of
jump in spending in the next few months. The financial crisis has also caused a serious increase of 26
per cent in bankruptcies in April compared to the same period last year. Soren Overgaard Madsen of
the credit analysis group Experian says that the figures are clearly at the high end of what we have
seen in the last decade and more than double of what one saw in 2008. Even though Denmark`s
growth has slowed, it is still one of the most competitive economies in the European Union according
to the World Economic Forum, ranking third in Europe behind Sweden and Finland. The Danish
Financial Minister Claus Hjort Fredriksen still believes that euro adoption is a good idea for his
country. He states that “Euro membership has a number of both political and economic advantages
such as more political influence in Europe, small but certain economic benefits for citizens and
companies”.

Estonia
In its Economic Outlook, Nordea is expecting the Estonian economy to grow 1.2 per cent in 2010 and
4 per cent in 2011 based on stronger exports and entry into the Eurozone. This is modest compared to
the last couple of years with the main challenge being to bring down unemployment. The number of
unemployed persons increased by 30,000 in the first quarter of 2010 to 137,000 persons. According to
the Estonian Labour Force Survey, the unemployment rate now is 19.8 per cent. On a positive note,
the international rating agency Fitch is prepared to upgrade Estonia`s sovereign ratings. This is due to
the European Commission’s recommendation that Estonia should be accepted into the Eurozone. The
European Commissioner for Economic and Monetary Affairs Olli Rehn says that although recent data is
promising, Estonia’s bid to join the zone next year is still not a done deal. Before the report from the
European Commission, John Andrew from the Economist Intelligence Unit in London stated that
although Estonia is likely to meet the targets set by the commission, current zone members are
expected to take a more stringent approach due to the Greek crisis. There is therefore a risk that euro
adoption could be delayed until 2012-13.




Finland
Finland as a member of the Eurozone is concerned with the Greece debt crisis; the Finnish Economy
Minister Mauri Pekkarinen said that the Greece Resolution is very important for the Euro. The Finnish
Prime Minister Matti Vanhanen called on the European Union to be tough on Member States
breaching EU rules, stating that ‘unacceptable policies should lead to credible sanctions, be it fines or
freezing structural and cohesion payments (…) good money should not be thrown at bad economic
policies.’ Naturally the Greek crisis creates a debate on whether it was a good idea for Finland to join
the euro. Like its members in the Nordic region, Finland is performing well in the World Economic
Forum’s (WEF) rating of competitiveness. According to WEF’s study Finland is the second most
competitive economy in the EU. Nokia, Finland’s largest company and the world’s biggest maker of
mobile phones, filled a patent-infringement lawsuit against Apple regarding their competitors
products called the iPhone and iPad. This lawsuit is the last one in a row and seeks an unspecified
amount of cash compensation and an order that would halt Apple’s use of Nokia inventions.

France
Though first quarter economic growth in France was low (0.1 per cent), Christine Lagarde, the French
Minister of Finance, still expects the French economy to grow by 1.4 percent in 2010. Lagarde also
expects the French economy to grow by 2.5 per cent in 2011 and 2012, despite a downturn in the
financial markets in the last two months. Inflation in France is also on the rise with statistics showing
a 1.7 per cent rise in consumer prices, mainly due to increasing energy costs. It is believed that the
slight rise in inflation is proof that the French economy is growing and allowing for increased
consumer spending. With regard to the debt crisis plaguing the Eurozone, a poll commissioned by Le
Figaro shows that there is support for bailout packages for fellow Eurozone members. The poll
showed that 69 per cent of people believed that the bailout of Greece was a good thing after it was
announced that the French contribution to the bailout could reach €110 billion. Another indicator of
growth is an increase in part-time employment. According to recently released statistics, the number
of part time jobs has increased by 3.7 per cent in March 2010 and by 22.8 per cent in the preceding
month. Despite the increase in part-time employment, unemployment increased by 0.5 per cent in
March and the number of job seekers sits at 2,661,300 people.

Germany
On 11 May 2010, the German cabinet approved its €123 billion share of the Eurozone bailout package
for Greece, with a provision of a 20 per cent increase on approval of the Bundestag budgetary
committee. This approval comes on the heels of reluctance on the part of the German government to
bailout Greece and the bailout has been largely derided by the Germany conservative press and the
opposition Social Democrats. This approval follows close examination of the bailout package in
question and possible alternatives to a large government bailout. Many in Germany question whether
or not this bailout will be of any use or if it will be a temporary fix. To ensure that Greece implements
the austerity measures required to stabilise the Eurozone, it has been suggested by Jürgen Rüttgers,
the Minister President of North Rhine-Westphalia, that a European Commissioner be sent to Athens to
ensure that spending cuts are made and that the accounting procedures are indeed accurate.




Domestically, the German economy remains stable and its debt rating from Standard & Poor’s has
held at AAA.

Greece
Despite the fact that the government hailed the Eurozone-IMF rescue mechanism put together on 25
March as a big success, the reality in the financial markets proved much harder for Greece. The
country’s first bond issue after the agreement received a cool response from the markets, and its
credit rating was subsequently downgraded to ‘junk’ status, thus prompting the Greek government to
officially request assistance in April, first from other Eurozone members and then from the IMF. The
final rescue package was agreed upon on May 2 and was much larger than the original Eurozone-IMF
mechanism envisaged. In the evening of 6 May, the Greek Parliament voted into law the austerity
measures that were a precondition for Greece to receive the financial aid put together by the IMF, the
ECB and the Eurozone members. The measures focused on public sector wage and pension cuts, public
expenditure reduction and an increase of VAT and other taxes. The vote was not without ramifications
for political parties either, as three Members of the Parliament from the ruling Socialist party rejected
the bill, while a leading conservative opposition Member of the Parliament approved it going against
party line. All four were promptly ejected from their respective parties. News of unrest and
uncertainty over the Greek government’s ability to implement the austerity package caused severe
losses in world stock exchanges in the morning of 7 May, thus further deepening fears of contagion of
the debt crisis to other euro-members. With parts of Greek debt maturing in May, the rescue package
should allow Greece to stay afloat for the time being. Quarterly installments of the loan will be made
after the EU reviews the effectiveness of the public expenditure-cutting measures. Nevertheless,
some voices in Greece raised the issue of alleged inconsistencies between the harsh measures
imposed on Greece and the arguably laxer conditions included in the euro-support mechanism agreed
upon on the weekend of 8-9 May for countries facing speculative attacks. With unemployment rising
to a six-year high of 12.1 per cent and GDP expected to shrink by 4 per cent this year, the volatile mix
of a struggling economy and social tension should be expected to keep uncertainty over Greece and
the euro high.

Hungary
Hungary entered a new political era with the elections of 11 and 25 April 2010. The socialist
government was routed at the polls, as the main opposition conservative party of Viktor Orban, Fidesz,
won an overwhelming two-thirds majority in the Hungarian Parliament. The new stable government
was hailed as a positive development for the further consolidation of the country’s credibility in world
financial markets. The Orban government is expected to build on the previous government’s austerity
measures, which culminated in the Hungarian Central Bank MNB’s recent cut of its benchmark base
rate by 25 points to 5.5 per cent in early April, in the planned curbing of the budget deficit down to 3.8
per cent for this year, as envisaged in the agreement with the IMF and the EU, in the massive
reduction of the current accounts deficit, but also in a hike in unemployment to 11.4 per cent, the
highest since 1994. Yet with the new government, new doubts arise: Fidesz leaders doubt that the
new government is really able to meet the 3.8 per cent goal this year. On top of that, they want to




renegotiate key terms in a new agreement with the IMF and the EU, the old one expiring in October
2010. Viktor Orban is on a collision course with MNB governor András Simor, while it is still unclear
how he plans to implement his electoral pledges for tax reductions and more growth-geared policies.
The release of surprisingly positive news that the Hungarian economy grew by 0.1 per cent in the first
quarter of 2010 for the first time after the third quarter of 2008 prompted the outgoing finance
minister to insist that Hungary should be able to meet the 3.8 per cent deficit target, thus adding to
the uncertainty. This uncertainty, coupled with the Mediterranean debt crisis, may still have negative
repercussions in Hungary’s dealings with the bond market in the immediate future.

Ireland
The Central Statistics Office announced that the rate of the annual consumer prices fall continued to
moderate in April 2010. The prices were 2.1 per cent lower than in the previous year. The rate
reached 3.1 per cent in March and 3.2 per cent in February. Irish deflation reached the highest level of
6.6 per cent in October 2009, and since then the rate of decline has fallen. Allied Irish Banks (AIB)
announced that the government's stake in the bank would rise to more than 18 per cent since it
increased the holding rather than paying the state a dividend. The National Pension Reserve Fund
Commission was suppose to receive a dividend of €3.5 billion preference shares, worth €280 million.
The European Commission had requested the bank not make discretionary coupon or dividend
payments on certain securities, due to setting up the restructuring plan. Therefore, the shares will be
issued instead of dividends, and the NPRFC total ownership of AIB ordinary shares will rise to 18.61
per cent.

Italy
According the national statistics bureau Istat, Italy's GDP increased by 0.5 per cent in the first quarter
of 2010, over the last quarter of 2009, and was 0.6 per cent higher than the first quarter of 2009. The
increase was led mainly by the agriculture, industry and services sectors. The bureau forecasts that if
the current trend remains unchanged, Italy's GDP for 2010 will rise by 0.6 per cent. At the same time,
the International Monetary Fund predicts that the country’s GDP will reach a 0.8 per cent increase this
year. The International Monetary Fund also expects to see a deficit of 5.2 per cent of GDP with
inflation running at 1.4 per cent. The country’s deficit forecast is below the average for the 16-nation
euro area (6.8 per cent), but it is still better than in the Europe's stronger economies: Germany (5.7
per cent) and France (8.2 per cent). The OECD reports that Italian salaries are among the lowest of its
members. Based on the 2009 data, Italian salaries ranked 23rd in the 30-nation group and were 16.5
percentage points below the OECD average. The country’s average annual salary in 2009 was $22,027.
The OECD average reached $26,395 whereas in the euro area it amounted to the average of $28,454
and $25,253 – in the EU. Italian salaries were also the lowest in the G7 Group and were even lower
than in three countries currently facing financial turmoil: Greece, Spain and Ireland. However, they
were higher than salaries in Portugal, Czech Republic, Turkey, Poland, Slovakia, Hungary and Mexico.
The salaries were the net average for a single-person household and based on purchasing power. The
OECD calculated that in the first quarter of 2010 the unemployment averaged out in Italy at 8.6 per
cent of the labour force (up 1.2 percentage points from the first quarter of 2009).




Latvia
‘Latvia is coming out of the crisis,’ according to Ilmars Rimsevics, the Governor of the Latvian central
bank. At a contraction of 18 percent in 2009, the Latvian economy was one of the worst hit by the
crisis; however, the Latvian economy recorded growth of 0.3 percent in the first quarter of 2010.
Despite the modest growth of the economy, unemployment went up. The rate of unemployment
increased to 20.4 percent in the first quarter of 2010, up from 19.7 percent in the fourth quarter of
2009. Enlargement of the Eurozone is also on the minds of Latvia leaders. There is a fear among
politicians, including Latvian Prime Minister Valdis Dombrovskis, that the crisis is Greece could further
delay the accession of the Baltic states to the Eurozone. The Latvian government has undertaking
decisive austerity measures and the recent approval of Estonia to the Eurozone indicates that the
Baltics are on the way to recovery.

Lithuania
Though the economic outlook for Lithuania is not stellar, it is improving. Danske Banke has adjusted
its projections for the Lithuanian economy and now expects it to shrink by 2.2 percent rather than 2.9
as previously predicted. This outlook can be contrasted with that of the Lithuanian government, which
expects the economy to grow by 1.6 percent. Forecasts show that unemployment will increase to 15
percent over this year before contracting to 14.5 percent next year. Like the Latvian leadership, the
government of Lithuania is fearful of the Greek debt crisis hurting their chances of adopting the euro
but at the same time are cautiously optimistic after the enlargement of the Eurozone to include
Estonia.

Luxembourg
There is no reason for financial markets to panic as the Eurozone has shown commitments to fiscal
consolidation and the euro remains a stable currency, Luxembourg Finance Minister Luc Frieden
declared on 11 May. Frieden told Reuters Insider television that the euro is and will remain as a stable
currency and that they have shown commitments to fiscal consolidation within the Eurozone, and
therefore there is no reason neither to panic nor overreact. The finance minister said he was not
worried about inflation but said the Eurozone and the ECB must take the right action to make sure it
does not become a problem.

Netherlands
A majority of MPs have backed the EU and IMF's plan to bail out Greece during an emergency debate
on Friday, 7 May. The Dutch contribution will amount to some €4.7 billion over three years; despite
initial opposition, Christian Democrat and VVD MPs voted in favour of the plan. However, Dutch
central banker Nout Wellink has said that the rescue package must be coupled with a stricter
application of the Stability and Growth Pact rules. Countries such as Greece, Spain and Portugal need
to put their budgets in order quickly to prevent the crisis from escalating, as the safety net provided by
the Eurozone has a temporary nature, Wellink said. Wellink, who is also a member of the European
central bank's governing council, called for tougher rules to govern the Eurozone Stability Pact. On a
different topic, a parliamentary commission led by Socialist MP Jan de Wit has now completed the first




stage of investigating the support given by the government to banks and insurance companies over
the past few years. The report is highly critical of all players in the financial sector, be they bankers,
regulators, Members of the Parliament, shareholders, companies or savers, with each group having
contributed in its own way to the crisis. In particular, the report criticised former finance minister
Wouter Bos and the central bank for not resisting the takeover and break-up of the ABN Amro empire
or keeping the Icelandic internet savings bank Icesave at bay. A majority of MPs, including the CDA and
VVD, believe that the next part of the investigation should take the form of a full parliamentary inquiry
which gives broader powers to the investigators. This would enable witnesses to be questioned under
oath, unlike the case of the current parliamentary commission, which could not force witnesses to
appear or answer questions, leading to criticism in some quarters.

Poland
The Polish government accepted the outline of the budget deficit for 2011. It predicts GDP growth of
3.5 per cent and inflation of 2.3per cent. The experts say that these will make the reduction of Polish
budget deficit to 3 per cent very difficult. The country needs to reach this threshold in order to adopt
euro by 2012 whereas the current deficit reaches 7 per cent of GDP. The country looks increasingly
unlikely to join the euro zone within the next few years. The Greek crisis brought new uncertainty to
Poland’s plans to adopt the common currency, and the prediction that it would enter in 2015 looks
unreal. Prime Minister Donald Tusk announced that coming up with a schedule for euro adoption was
“no longer a priority.” Foreign investments in Poland have improved but this is taking place slower
than in 2009. Unemployment level decreased in March by 0.6 per cent reaching the level of 12.3 per
cent as a result of seasonal factors. 1.97 million people were registered as unemployed. According to
the former deputy president of the National Bank of Poland, Krzysztof Rybinski, the country’s economy
may benefit from weakening of zloty in the wake of euro. Mr Rybioski said that a weaker złoty in fact
supports Polish exporters, favors the sale of goods from our factories in Western European markets
and increases margins in exports. In effect, it helps the Polish economy emerge from a slowdown.

Portugal
In Portugal, economic recovery is dogged by fears of the ‘Greek contagion.’ On 27 April 2010,
Portugal’s debt rating was downgraded for the second time this year to BB+ with a negative outlook.
As a result, Portuguese sovereign bonds are now considered the eighth-riskiest in the world and their
risk premiums have doubled in the last month. At 77 per cent of GDP, Portugal’s public debt is not the
highest in Europe, however corporate and personal debt stands at 236 per cent of GDP, a figure that is
higher than in Greece and Italy. Furthermore, Portugal’s growth has stagnated. ‘The reason that we’re
concerned about Portugal is not because public sector debt ratios are excessively high, it’s more that
the Portuguese economy doesn’t really grow,’ said Kenneth Wattret, the chief Euro region economist
at BNP Paribas in London. GDP growth in Portugal has stood at less than 1 per cent per year in the
last decade. In response to calls for austerity, Prime Minister Socrates has pledged to cut budget
deficits from the current 9.4 per cent of GDP to 2.8 per cent by 2013, though this may be hampered by
his lack of a parliamentary majority.




Romania
Romania will not be able to adopt the euro by the 2015 initial deadline, as announced by Lucian
Croitoru, advisor of central bank's governor. The central bank governor had recently declared that a
slight delay in joining the euro area would be less harmful than moving to adopt the euro before being
fully prepared. Romania's target for the switch to the euro was set for 2014-2015. One contributing
factor to this situation relates to the country’s economic performance in the first months of the year,
which was below expectations. The remarks come from the joint teams from the IMF, the European
Commission and the World Bank which have been present in Bucharest for the fourth review of
Romania's performance under a €20 billion bailout loan signed last spring. Their findings are also
backed by statistical data for the first quarter of 2010, which show that Romania is still in recession:
first quarter gross domestic product shrank by 0.3 per cent in real terms compared with the earlier
quarter. However, European Commission statistics predict that Romania will register economic
growth of 0.8 per cent of GDP this year, while for 2011 the EC estimates 3.5 per cent economic
growth. In a bleaker outlook, ING Bank analysts have warned that Romania may be in recession for
the rest of 2011, as ‘severe problems still persist.’ To counter these negative predictions, the country
has told the International Monetary Fund (IMF) it will introduce measures regarding cuts in the public
sector. In the letter sent to the IMF, the government said it was committed to cutting the ‘13th month’
salary paid to public sector employees. Other measures include taxing food vouchers, capital gains,
plans to privatise or close down two state companies, freeze early retirement staring 1 June 2010, as
well as reducing the number of public employees to 1.29 million this year by laying off about 70,000
employees. President Traian Basescu also announced that public sector salaries will be cut by 25 per
cent and pensions and unemployment aids, by 15 per cent, starting June. Romania has also promised
to keep the budget deficit under 7 per cent of GDP, in line with European accounting standards

Slovakia
The economy grew in the first quarter of 2010 at a rate of 4.6 percent year-on-year in constant prices,
according to the Slovak Statistics Office. Last year, Slovakia’s economy contracted by 4.7 percent after
years of robust growth exceeding 6 per cent. However, economists also predict that economic
performance in the second half of the year might be affected by austerity measures if the government
formed after the 12 June general election opts for belt-tightening policies. The first three months of
2010 indicate that banks’ levels of profitability will be higher this year than last. In February alone, the
sector’s profit rose 15 percent year-on-year. This is also because last year’s one-off cost factor – the
adoption of the euro – will not be repeated this year. On the EU note, the European Commission has
given its approval for Slovakia to construct five highway sections stretching 75 kilometres under the
condition that solutions are prepared for overcoming any negative environmental impacts on sections
of the highway which will traverse protected natural areas. Along with environmental concerns that
have been raised, the government’s strategy to build highways via public-private partnerships has
been accompanied by an intense debate over the price tags of the projects. Critics of the strategy say
the first package is overpriced and that the state would be much better off paying for this highway
construction through the state budget or by seeking European Union funds. After the EU finance
ministers agreed on providing a loan for Greece, three Slovak centre right parties (currently in the




opposition) initiated the extraordinary parliamentary session on the EU rescue package for Greece.
However, the absence, on four successive occasions, of MPs from two of the ruling parties meant that
the session had to be abandoned on 13 May.

Slovenia
According to the 2010 spring forecast, the Slovenian GDP declined by 7.8 percent in real terms in
2009, largely attributable to the impact of the economic and financial crisis. The steepest decline,
more than one fifth, was recorded for investment activity, which fell in all areas. Economic growth is
projected to be 0.6 percent in 2010, slightly below the autumn forecast (0.9 per cent). The economic
recovery, first seen in the second quarter of last year, will be slow, with possible fluctuations between
quarters. The labour market situation is also not expected to be any better this year. Under these
assumptions, economic growth this year will mainly be based on higher foreign demand, amid
significantly weaker growth stimuli from the domestic environment. With a gradual recovery in the
international environment, exports are projected to increase by 4.3 percent in real terms. The
contraction of economic activity was, albeit with some delay, followed by the tightening of labour
market conditions, which will also continue this year. Employment dropped by 2.2 percent last year,
most notably in manufacturing and construction. Total wage growth, last year still relatively high due
to significant wage increases in the public sector, is projected to decline somewhat this year. Last year,
the private sector responded to deteriorating economic conditions by shrinking overtime hours and
slowing wage increases. This year, the current account deficit will widen slightly again, after last year’s
significant drop. The current account deficit, which had been strengthening in the period of favourable
economic trends and high commodity price rises on world markets, shrank notably last year. Assuming
a further revival of global trade and domestic investment and private demand, Slovenia’s economy will
gradually recover in 2011 and 2012. The spring forecast of economic growth is 2.4 per cent for 2011
and 3.1 percent for 2012. Growth is thus not expected to reach pre-crisis rates, which were
attributable to an exceptionally favourable international economic situation and high domestic
construction investment coupled with relatively inexpensive liquidity on international and domestic
monetary markets.

Spain
Spain became the latest Eurozone country to announce sweeping austerity measures as the
executive European Commission sought unprecedented power to pre-vet national budgets. Prime
Minister Jose Luis Rodriguez Zapatero has announced Madrid would slash civil service pay by 5 per
cent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector
jobs in a drive to meet EU deficit targets. The announcement came two days after Eurozone
governments, the European Central Bank and the IMF agreed on the rescue package to stabilise the
euro in exchange for pledges from highly indebted European countries to cut their deficits. Before
these measures were announced, U.S. President Barack Obama had encouraged Spain to implement
economic reforms, seen as critical to helping prevent a European debt crisis from stalling U.S. and
global economic recovery. Obama called Prime Minister Jose Luis Rodriguez Zapatero to discuss the




importance of ‘resolute action’ by Spain, a country whose public finances, along with Portugal's, have
caused the most concern after those of Greece. But the unions have reacted negatively to the
austerity measures. The unions have proposed a public sector strike on 2 June to protest the
government's plan to cut public sector wages by an average 5 per cent in 2010 and freeze wages in
2011, and cut public investment spending by €6 billion.

Sweden
Sweden remained the most competitive economy in the European Union, according to the World
Economic Forum study. The Swedish krona also remains one of the best performers among the
world’s most-traded currencies. While the number of bankruptcies in neighbouring Denmark is on its
highest level for decades, the number has fallen with 19 per cent in Sweden compared to last year.
The unemployment rate is also falling for the first time since the crisis; there are now 1,847 fewer
unemployed compared to the same time last year and the number of vacancies is also on the way up.
Sweden will contribute SEK 1 billion to the Global Environment Facility (GEF). At the negotiations in
Paris, donors agreed to add $4.25 billion to the fund, which is an increase of 52 per cent compared to
the last replenishment. Sweden pledged a contribution of over SEK 1 billion.

United Kingdom
The UK trade deficit in goods and services reached £9.7bn. Over the first quarter of 2010, the volume
of British exports decreased by 1.3 per cent and imports rose by 2 per cent - mainly due to the
increase in imports of semi-manufactured goods and basic materials. The general widening of the
trade gap is mainly a result of the increased trade deficit with the non-EU partners. According to the
Office for National Statistics, the UK’s trade deficit widened to £3.7bn in March from £2.2bn in
February 2010. The figures show that despite the weaker pound the country is struggling to export its
goods. The Bank of England governor, Mervyn King, stated that the UK's economy should therefore
concentrate on exports, rather than relying on domestic consumption. This will be particularly difficult
due to the recent events in the Eurozone – UK’s main trade partner. Nevertheless, the UK economy
has just started to recover from recession. After a year and a half of contraction, GDP grew by 0.4 per
cent in last quarter of 2009. National output continued to rise in the first quarter of 2010 but by only
0.2 per cent in late April. It is 5.6 per cent less than the peak level at the beginning of 2008.
Nevertheless, the Treasury experts predict that the British economy will expand by only 1.3 per cent in
2010. This situation will take place mainly due to the fact that the companies stop delisting at the rate
that exacerbated recession in 2009. Unemployment reached 2.5 million (8 per cent workforce) and is
the highest since 1996 and it is most likely to carry on rising.




WORLDWIDE
Brazil
The Brazilian economy is partying like it is 2008 while the highly developed countries fight with the
crisis. The real GDP growth forecasts for 2010 have reached a brisk 6 per cent — the best performance
since 1986. It is not entirely positive news due to the risk of overheating economy and the possibility
of high inflation level. The Central Bank’s monetary-policy committee increased the SELIC benchmark
interest rate by 75 basis points to 9.5 per cent and it will probably tighten much more in the following
months. The Brazilian boom is based on solid foundations of the constantly growing global demand for
the country’s farm exports, oil and iron ore. Millions of Brazilians triggered higher consumption –
partly thanks to an expansion of bank credits. The country’s inflation rate creeps up from the 5.2 per
cent over 2009. It exceeded the target of the Central Bank set at 4.5 per cent as in services the figure is
approx. 7 per cent. It is, however, a far cry from the four-digits past inflation spirals.

Canada
While the United States is still dealing with its recession, Canada is nine months into recovery.
Canadian Minister of Finance Jim Flaherty thinks that the country’s strong performance is due to its
conservative financial system and the fact that because of the tight regulation, the banks were much
less willing to grant loans than their American counterparts. Thanks to that the house prices in Canada
remained unchanged resulting in volume and value of Canadian home sales hitting record highs. E.g. a
house in Ottawa listed at $435,000 sells for $600,000. Higher prices on the real estate market
triggered the increase in the construction industry as well as furniture and building materials sellers.
The country’s energy industry has gained importance as the new investments planned for Alberta’s oil
sands. Sinopec, a Chinese oil company, announced last month that it would pay $4.65bn for a 9 per
cent stake in Syncrude Canada, the largest operator in the sands. This investment comes at an
opportune time since the Province of Alberta recorded a budget deficit in 2009, its first since the rapid
increases in crude oil prices since 2003.

China
Chinese inflation accelerated in April as a consequence of an increase in house and food prices and
the rise in bank lending. This raised concerns that the third-largest economy in the world might
overheat and raise interest rates. According to the country’s statistics bureau, prices in April 2010
were 2.8 per cent higher than in April 2009, the highest rate in 18 months. However, some experts still
think there is no danger of an increase in interest rates because of the debt crisis all over Europe as
well as fragile international economy. The Chinese economy grew 11.9 per cent (annual rate) in the
first quarter of 2010 triggered by Beijing's 4 trillion yuan stimulus package.




UnitedcStates
The US trade deficit increased in March to the highest level in 15 months thanks to the increase in
imports as the corporate and consumer demand is rising. According to the Department of Commerce,
the gap between imports and exports rose 2.5 per cent to $40.4 billion. Imports of goods and services
were up 3.1 per cent to $188.3 billion in March, while exports rose 3.2 per cent to $147.87 billion –
dampened by the fiscal crisis in Europe. The trade deficit with the EU rose to $7.1billion in March (32.7
per cent jump). Official figures show that the whole US economy grew at an annual rate of 3.2 per
cent in the first quarter of 2010 (5.6 per cent in the fourth quarter of 2009). The slower growth was
caused by the reduction of government spending and a decrease in exports. President Barack Obama
is convinced that the US is moving in the right direction and that the latest figures were ‘an important
milepost on the road to recovery.’ At the same time, the government posted its 19th consecutive
monthly budget deficit which is the longest shortfall ever.

Vietnam
On 15 April, a new State Bank of Vietnam's decree came into force barring independent agencies
from rating banks unless they meet numerous conditions. This was the result of a report published by
the VietnamCredit – the country’s only independent credit rating agency. The report gave low remarks
to the largest state-owned banks. The government’s reaction to that publication raised questions
whether Vietnam is ready to accept the freedom of commercial information. The Vietnam Banking
Association claims that the report included data from 2008 when the banks were struggling with the
global financial crisis instead of using the 2009 data in the better market conditions. Consequently, the
State Bank barred VietnamCredit from marketing. Soon, a circular will be published in order to lay
down the new rules for credit-rating agencies. According to these regulations the agencies would have
to obtain the assent of at least 20 banks to act as their exclusive rating agency and they would have to
be headed by the graduates of the Banking University. VietnamCredit’s Le Dinh Quan said that
according to this draft decree, it seems like there will be only one organisation that can do credit
ratings. And that’s the organisation that prepared the draft decree.

INSTITUTIONS
European Parliament: On 14 April 2010, the European Parliament organised a public hearing on
the Greek fiscal crisis. In this hearing, Olli Rehn, the European Commissioner for Economic and
Monetary Affairs and Gerald Corrigan, Chairman of Goldman Sachs were asked a variety of questions
on the role the way forward. The general feeling gained from the questioning of the Commissioner
was that there was a need to strengthen the Stability and Growth Pact, but in a way that feel short of
expelling Eurozone members that did not comply. A delegation of MEPs returned from Athens in
early May after conducting a fact-finding mission. Their findings were that although it was fair that the
EU demand guarantees from the Greek government regarding improving the state of public finances,
there was a feeling among average Greeks that they were being accused of creating the economic




problems in the first place. Finally, on 17 May 2010, the Economic and Monetary Affairs Committee
was set to vote on the text proposed by the European Commission to further regulate the hedge
fund sector. The proposal includes the creation of the European Systemic Risk Board to oversee the
financial system and provide warning of an impending crisis and possible solutions.

European Commission: Commissioner for Internal Market and Financial Services Michel Barnier
has called for compromise ahead of a likely vote on EU hedge fund regulations. The attempt to
increase regulations on what can be described as a little-understood part of the financial sector has
met with fierce opposition from the City of London. Most importantly, however, the European
Commission José Manuel Barroso has released the European Commission priorities for the upcoming
G20 Summit in Toronto. In general, the Commission’s priorities include negotiating a global strategy
to exit the crisis as has already been developed in the EU and to ensure that the global deal matches
the objectives set out in the Europe 2020 Strategy last month. President Barroso said, ‘The events of
the past weeks have again exposed just how interconnected markets and economies around the world
have become. The G20 remains a key vehicle for the EU to drive forward a reform agenda which
tackles the challenges exposed and which commits our international partners to deliver too. Recovery
from the crisis and a shift to sustainable, responsible, growing economies and markets are shared
goals that can only be delivered by a shared global effort.’

EPP Views
The EPP has strongly endorsed the measures undertaken by the Council of Ministers to stabilise the
Eurozone, though there still remains much to be done. Joseph Daul, the Chairman of the EPP Group in
the European Parliament has said that we should ‘now expect the European Commission to ensure
that the Member States make the Stability Pact their main priority. Each Member State must, as soon
as possible, revert to the Pact's criteria and take the appropriate budgetary measures to do so.’ In
addition, José Manuel García-Margallo, Vice Chairman of the Economic and Monetary Affairs
Committee of the European Parliament, has said that the EPP will now fight for the creation of a real
European system of financial supervision to help avoid a future crisis on this scale. Margallo went on
to call on the Spanish Presidency to push the ECOFIN Council to be more proactive and establish
measures that keep the EU from being in a damage-control mode.

OUR COMPETITORS’ VIEWS
S&D
On 6 May 2010, the S&D Group proposed the creation of the European Systemic Review Board
European Systemic Review Board to supervise the financial markets of Europe. This body would be
linked with the European Central Bank, though the main organs would be composed of external
experts that would assess the risks of systemic crisis in the EU. Martin Schulz, the Chairman of the S&D
Group in the European Parliament condemned the leaders of Europe for the amount of time that it




took for them to approve a bailout plan for Greece, saying that this delay was even more apparent
when this is compared with the amount of time that it took for national governments to bailout their
financial institutions. The S&D Group applauded some of the measures in the Europe 2020 Strategy
but warned that the Europe should not engage in systemic spending cuts but should rather increase
smart investments to strengthen the European economy.

FROM THE BLOGOSPHERE…

Europe is unprepared for austerity. Gideon Rachman comments on the remaining problems after the
€750bn bail-out for the euro.

Where's the outrage? The Economist’s Free Exchange blogger wonders if Washington should be more
concerned about the US joblessness.

An ever-closer Union? Stephanie Flanders elaborates on the future of the Eurozone.

Editor: Roland Freudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff
Research Assistance: Katarína Králikovácccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Additional Assistance: Angelos Chryssogelos, Diana Wasilewska, Ioana Lung, Giovanni Mastrobuono,
Stian Karlsen
Design: José Luis Fontalbaccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Questions and comments: briefs@thinkingeurope.eu


Economic Recovery Watch 19May 2010

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Economic Recovery Watch 19May 2010