IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
Last week, Eurostat published the statistics on GDP growth for 2009 and it is without surprise that we read in the data a slowing down of economic growth for OECD countries. The average decrease in GDP points for EU countries is -4.2%. But this average is hiding some astonishing disparities.
While almost all of the old EU member states gravitate around this average (EU 15 average is at -4.1%), the new member states are experiencing an impressive economic fall. Hence, Bulgaria’s GDP, which enjoyed +6% growth in 2008, declined in 2009 by -5%. Same thing for Romania, which went from +7.3% growth in 2008 to -7.1% in 2009 or Slovenia, from +3.5% in 2008 to -7.8% in 2009, or for that matter Slovakia, which went from +6.2% to -4.7%. The situation is even more catastrophic in Baltic countries. Estonia lost 14.1 GDP points in 2009, Lithuania –15% and Latvia an astonishing -18%! (Source: Eurostat) Not surprisingly, this state of affairs goes together with high unemployment rates: 13.8% unemployment for Estonia in 2009, 14% for Lithuania and 17.6% for Latvia, 10% for Hungary, 11.9% for Slovakia.
Why do we observe such disparities? One possible explanation to such poor performance of Eastern European and Baltic countries is their economies are heavily dependent on foreign investments. The World Bank EU10 2009 Economic Report is pointing out that, in all those countries with the exception of Bulgaria and Romania, direct foreign investment drop below 2% of GDP from an average of 7.3% of GDP in 2007. In Bulgaria, FDI weighted 30.6% of GDP in 2007 and dropped to 9.8% in 2009.
A related explanation is to be found in the dependence of those relatively small economies on exports. Exports were growing by 23.29% in 2006, 17.35 in 2007 and 13.13% in 2008. The same study reports that exports went down by 21.95% in 2009.
Another field where the average is hiding great disparity is fiscal policy. If public deficit and public debt went up in all countries, the situation is not alarming everywhere. While the EU-10 (the group of ten countries that have joined the EU in 2004) general government deficit doubled from 3.3 GDP points in 2008 to 6.5 GDP points in 2009; the EU-15 (the “old” members) had their public deficits increased by 170%, from 2.6 GDP points to 7.1 GDP points in 2009). According to the World Bank report, the high fiscal deficits in 2009 are not only due to the weak state of the economy, but reflect the lack of progress in advancing public expenditure reforms, generous spending and weak public expenditure controls in recent years. Also, the current deficits are not coupled with high level of public debt everywhere. In most EU-15 countries debts have reached alarming picks. Such is the case in France, Italy or Belgium. In contrast, the public debt of Estonia is at 7.8% of GDP, of Bulgaria at 14.7%, of Romania at 23% and so on.
Forecasts for the coming years, provided by Eurostat and the World Bank, are not too dull. Both institutions expect a return of the growth for 2010-2011. But, here again, we would have to look beyond the average. Where the economic drop was due to a great degree of openness and small public sector—like in the EU-10 countries, the reaction to the crisis has been violent but the takeoff after the crisis will probably be just as astonishing. Larger countries with overdeveloped public sectors, skyrocketing public debts and protectionist tendencies will have to satisfy themselves with sluggish growth.