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Will Brexit affect growth prospects in the EU Members of Central and Eastern Europe?

By Blog Admin, on 26 May 2016

Chiara Amini – Teaching Fellow in Economics and Business and Raphael Espinoza – Lecturer in Economics
UCL SSEES Centre for Comparative Studies of Emerging Economies

It is a common view that a UK exit from the European Union would cause significant damage to the UK and to the EU.  The Treasury claims that Brexit would make Britain significantly poorer and could result in GDP contracting by as much as 6%. Such a significant impact would not be so surprising, given that trade and investment between the UK and Europe has grown significantly in the last 40 years. In 2014 a study by Ottaviano et al showed that Brexit trade losses would amount to 3.6% of UK GDP, as a result of an increase in taxes, quotas and regulatory legislation. What’s really striking is the fact that these losses have the potential of reaching 10% of GDP, if we consider the dynamic effect of trade on innovation and competition. Earlier this year, JPMorgan estimated that Brexit could reduce GDP growth by as much as 1% between 2016-17. At the same time the bank also warned that Brexit could decrease Eurozone GDP by 0.2-0.3%.

Policymakers in the EU countries of Central and Eastern Europe have been vocal in expressing their concerns about Brexit. The countries this specifically refers to are: The Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slovakia and Slovenia.  Recently Poland’s President, Andrzej Duda, warned that Brexit could have dramatic consequences for the Polish economy. However, formal analyses estimating the impact of Brexit on the region number on the fingers of one hand. Erste Bank argues that direct economic consequences on the region would be relatively minor as UK trade amounts to only 3-6% of total trade. However, countries such as Poland, Czech Republic, Hungary, Latvia, Lithuania and Slovakia, that run trade surpluses with the UK, are predicted to be most affected. After looking at the macro data, we can argue that Central and Eastern Europe would not only be affected by Brexit directly via a fall in flows from the UK, in terms of migration and remittances, trade and financial flow, but also indirectly through its effect on the Eurozone. As economic shocks spread easily from one country to another, a phenomenon known as ‘financial contagion,’ the impact of Brexit on the Eurozone would further reduce inflows to Central and Eastern Europe.

 

Financial flows from the UK to Central and Eastern Europe appear moderate (see Figure 1).  The median of UK financial flows to GDP is less than 1%.  Trade flows (import and export) are much more important, and they represent around 2.5% of GDP in Central and Eastern Europe.

Figure 1– Median Flows UK- Central and Eastern Europe

 

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However, taken together, UK trade and financial flows make up a sizeable share of the total flows to the region.  The proportion of UK remittances to total remittances in Central and Eastern Europe is as high as 8%. As far as trade is concerned, this ratio is 4%. Inevitably, some countries in the region have even stronger links with the UK; for instance, in the Czech Republic, foreign direct investment from the UK constitutes 14% of its total foreign direct investment.  Also in the Czech Republic, bank loans from the UK represent 2.5% of GDP. UK remittances also constitute an important part of total remittances sent to Latvia and Lithuania, over 20% of the total.

Moreover there has been a high degree of correlation in the economic growth between Central and Eastern Europe and the UK. This could be the result of financial contagion via other, third party countries. Alternatively, it could stem from both regions’ high integration with the two largest world economies, the US and the Eurozone.  However, the correlation between growth in Central and Eastern Europe and the UK (at 0.56) is higher than that between the US and Central and Eastern Europe. (0.43, see Figure 2) Disentangling such correlations so as to understand how economic shocks are transmitted between countries has been done in a variety of models.

 

Figure 2 – Real GDP growth (Year-on-Year; source: OECD and IMF)

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Our analysis shows that the UK is a significant source of financial contagion for Central and Eastern Europe. If, as a pessimistic example, estimated by PwC earlier this year, UK GDP fell by 5% as a consequence of Brexit, this would reduce GDP growth in Central and Eastern Europe by no less than 2.5%, as a consequence of third party financial contagion. Since the model is linear, if the fall in UK GDP was only 1%, the impact on Central and Eastern Europe would be only 0.5%.

 

Historically, shocks to UK GDP have contributed around 20 % of the variance in growth in Central and Eastern Europe. In our research for this piece, we employed a well-known statistical methodology, Vector Auto Regression, to examine how growth in Central and Eastern Europe relates to the economic performance of the UK, US and Europe. The historical decomposition of growth in Central and Eastern Europe (Figure 3) attributes the good performance of Central and Eastern Europe in the first decade of this century to strong growth in the UK. This occurred at a time when growth in the Eurozone was disappointing.   

Figure 3. Historical decomposition on GDP growth in Central and Eastern Europe (YoY)

 

 

 

fig 3

 

 

 

 

We have come to the conclusion that, although it is uncertain what the short-term impact of Brexit on the UK will be, there are good reasons to think that it will have negative repercussions on Central and Eastern Europe.

 

Please note: Views expressed are those of the author(s) and not those of SSEES, UCL or SSEES Research Blog.

 

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Danube-on-Thames: The New East Enders

By Blog Admin, on 30 May 2014

This year, 2-13 June, SSEES is running the second UCL Global Citizenship ‘Danube’ Summer School on Intercultural Interaction. This is one of the four summer schools that make up the first year of UCL’s Global Citizenship Programme. The Danube Summer School brings together nearly one hundred students from across the University to learn about the Danube and the people that live along its banks. Coordinated by Tim Beasley-Murray and Eszter Tarsoly, the Summer School draws on the expertise of a wide range of SSEES academic staff, language teachers, and PhD students.

Below is a text from the Danube Summer School’s blog that explains the rationale for the Danube-on-Thames project, one of the Summer School’s outputs.

danube-on-thames1

Historically, the region through which the Danube flows has been a region of extraordinary cultural, ethnic and linguistic diversity. The realm of Empires (the Ottoman and Habsburg) that were multi-, rather than mono- ethnic, this was a region that did not care much for neat borders that separated one group of people from another. Here, you used to be able to find Serbian villages dotted in what was otherwise Slovak countryside, German- and Yiddish-speaking towns wedged between Romanian and Hungarian villages, pockets of Turks and other Muslims, Christians of all denominations (Orthodox, Catholic and varieties of Protestants) living across the region, and everywhere settlements of Germans (the so-called Danube Swabians or Saxons) as well those Danubian cosmopolitans, Jews, both Sephardim and Ashkenazim, and different groups of Roma.

A good, even clichéd image, of this cultural and ethnic plurality, as drawn, for example, by the Austrian writer, Joseph Roth, could be found in the classic Danubian café with its hubbub and chatter in many languages, its newspapers on sticks in German, Hungarian and Romanian, its Romany band playing music that draww on a complex fusion of musical traditions, its Jewish doctor playing chess with a Christian lawyer.

Today, much of this diversity has gone. The collapse of the multi-ethnic empires and the endeavour to create single-nation states, particularly following the First World War, started to tidy up the region and sorted people into national boxes. This process was continued in a much more violent way with the murder of most of the Danube’s Jews and a significant part of its Romany communities in the horrors of the Second World War. After the Second World War, this violence continued with the expulsion of the bulk of Germans from ‘non-German’ national territory – and also, to an extent, the removal of Hungarians from the more-spread out territories that they had previously occupied.

The raising of the Iron Curtain along the banks of the Danube, between Communist (Czecho)Slovakia and Hungary and capitalist Austria and between Communist Romania and non-aligned Yugoslavia, dealt another serious blow to the Danube as a site of intercultural flow. Most recently, the ‘ethnic cleansing’ that accompanied the Balkan Wars of the 1990s was a further step in the homogenization of the Danubian region.

The result is that the Danubian interculturality that this Summer School seeks to explore is not necessarily best explored on the banks of the Danube itself. Where then to look for it? (more…)

Hungary versus Europe

By Blog Admin, on 10 July 2013

Flags Makó

Photo: Burrows/Wikimedia commons

The EU must find a response to the increasingly aggressive nationalist turn of Hungary’s current government write Erin Marie Saltman and Lise Herman.

What does the European Union do about a member state that has recently been referred to as the ‘cancer in the middle of Europe’?

Hungary has come under increasing scrutiny from European Union bodies and international watchdogs since the 2010 national elections, when the Fidesz government won a two-thirds majority in parliament. Since then the right-wing government has installed large overhauls of the country’s foundational institutions, including a new constitution, fundamentally changing the functioning of the media, the judiciary, the Central Bank and the education system. Many of the government’s changes have mirrored propositions first put forth by Hungary’s radical right party, Jobbik.

These changes have been criticized by the European Union and international actors for reinstating undemocratic and authoritarian elements into Hungary’s governing foundations. While the Fidesz government has re-tailored some of their new legislation to appease international critics, they remain largely defensive of the new direction Hungary is taking. As a consequence, European institutions are having to confront the real challenge of defining their supranational power over members. (more…)

Borders and what they do: lessons from a lost Habsburg province

By Blog Admin, on 3 May 2013

Contested Frontiers in the Balkans-p17oi0ls081o7l132i1l2ld101al9Why write about a province that has long ceased to be and is currently divided between three states?  Irina Marin explains why she wrote about the historic Habsburg province of the Banat of Temesvár

Well-hidden behind the title Contested Frontiers in the Balkans: Ottoman and Habsburg Rivalries in Eastern Europe is a monograph of the Banat of Temesvár or, by its Romanian name, Banatul Timișoarei. Why write a book about a historical province that has long ceased to be one and is currently peacefully divided between Romania, Serbia and Hungary? Outside the region and a narrow circle of historians, the Banat is a classic Ruritania, a non-existent land for all the reality it has for outsiders.

Everybody will have heard of Transylvania, Bosnia or Kosovo, but I doubt the Banat of Temesvár is at all known in the English-speaking world. Even when events take place there which are worthy of public attention, people usually refer to the present-day countries rather than the historical province, even if the name ‘Banat’ is still in local usage. So why write a history of this seemingly obscure province?

First of all, because no such history is available in English. The region deserves putting on the map of Anglo-Saxon historical scholarship. This, however, is not a strong enough reason and does not forestall the Ruritanian accusation. We instead should perhaps turn the question around and ask what makes a province worthy of interest. Sadly, more often than not the answer is blood and violence: whether blood sucked by vampires (as in Transylvania) or massacres and ethnic cleansing (as in Bosnia, Kosovo). Extremes of violence should, of course, never be ignored or left unexplored and unexplained.

The problem arises when one concentrates exclusively on such places visited by unprecedented violence. It creates the impression that nothing but ethnic violence comes out of Eastern Europe and fuels myths of  ‘ancient ethnic hatreds’ as characteristic of the region.

I have therefore stopped at the Banat of Temesvár as a relatively peaceful province, with just as many ethnicities and religious denominations as these, but if anything dogged by myths of harmonious ethnic cohabitation rather than the perennial ancient-hatred myth. My new book is not intended to solve bibliographical disputes, count populations or work out who was there first. It is instead a historical meditation on the destructive and creative effect of ebbing and flowing borders on an ethnically variegated population, who lived and died under several waves of imperial rule, under nation-states and under communist and post-communist regimes. (more…)

Angry mainstream: Eastern Europe’s new ‘centrist populists’

By Blog Admin, on 20 January 2012

Allan Sikk and Sean Hanley detect a new breed of anti-establishment party emerging centre-stage in Eastern Europe.

Magyarországi választás 2010 Jobbik vadplakát Fidesz óriásplakát

Photo: Beroesz via Wikicommons

In both Western and Eastern Europe extremist populism and illiberal movements, we are told, are strong, politically influential and relentlessly on the rise.  In countries such Austria, Slovakia and Poland radical right parties have already held government office. Elsewhere they have sufficient parliamentary representation to influence government formation and help make the political weather. Recent electoral breakthroughs in countries without strong illiberal populist traditions by parties such the True Finns (2011), the Sweden Democrats (2010) or Hungary’s Jobbik (2010) seem to highlight the accelerated growth of such parties.

Given the greater impact of recession and reduced EU leverage in the region, the new democracies in Central and Eastern Europe (CEE) would seem to be especially vulnerable to such tendencies. However, notwithstanding the spectacular rise of far-right in Hungary, recent elections in key CEE states suggest that voters in the region are turning to new parties, which combine familiar anti-elite, anti-establishment populist rhetoric with mainstream pro-market policies, a liberal stance on social issues and calls for political reform.

 Poland’s October 2011 elections, for example, saw the wholly unexpected emergence as the country’s third force of a grouping led by maverick and political showman, Janusz Palikot, on a platform combining anti-clericalism and social liberalism with flat taxation and a slimmed down, citizen-friendly state. In May 2010 a new pro-market anti-corruption party, Public Affairs (VV), campaigning to kill off the ‘dinosaurs’ of the political establishment enjoyed a similarly meteoric rise in the Czech Republic, winning 10% of the vote. In Slovakia in elections a few weeks later the Freedom and Solidarity (SaS) party formed in 2009 by the economist and businessman Richard Sulík entered parliament with a similar vote share on a programme of fiscal conservatism and socially liberal reforms such as the introduction of gay marriage and decriminalisation of soft drugs. Hungary’s Green-ish  Politics Can Be Different Party (LMP) can, with some qualifications, be regarded in a similar light.

 Such centrist or (neo-) liberal populists, or as we prefer to call them anti-establishment reform parties (AERPs), are we believe, a growing and important phenomenon in Central and Eastern Europe and, perhaps Europe more generally.  A more careful and wider look at the CEE region over the last 10-15 years suggests that such AERPs are a widespread and common phenomenon which can, in some contexts, enjoy landslide electoral success: the Simeon II National Movement in Bulgaria (2001), New Era in Latvia (2002) and Res Publica in Estonia (2003) were all new, anti-establishment reformers, which topped – or came close to topping – the poll at their first attempt and headed new coalition governments. (more…)