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

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

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.

 

 

A new breed of protest party is being propolled to success in Central and Eastern Europe by a mix of economic hardship, rising corruption and ossified party establishments find Seán Hanley and Allan Sikk.

The spectacular breakthrough of Pepe Grillo’s Five Star Movement in Italy in February underlined the potential for a new type of anti-establishment politics in Europe – loosely organised, tech savvy and fierce in its demands to change the way politics is carried class, but lacking the anti-capitalism or racism that would make them easily pigeon-holeable as traditional outsider parties of far-left or far-right.

 But for observers of Central and Eastern Europe (CEE), the dramatic eruption of new parties led by charismatic anti-politicians promising to fight corruption, renew politics and empower citizens is nothing new. Indeed, over the last decade a succession of such parties – led by a colourful array of ‘non-politicians’ ranging from aristocrats to central bankers, journalists and businessmen – have broken into parliaments in the region.

  Some have achieved spectacular overnight success in elections on a scale easily comparable to Grillo’s and (unlike Grillo) have often marched straight into government. Some examples include Simeon II National Movement (NDSV) in Bulgaria in 2001, New Era in Latvia in 2002 and Res Publica (Estonia 2003) and, more recently, the Czech Republic’s Public Affairs party (2010), the Palikot Movement (Poland 2011), Positive Slovenia (2011) and Ordinary People (Slovakia 2012).

 In a new paper we explore what these parties, which we term anti-establishment reform parties, have in common and what drives their success. (more…)

Uncertainties about the EU’s future are undermining mainstream parties throughout Europe. In Central and Castern Europe politicians can no longer sell the European model of liberal reforms when that model is itself in crisis, argues Sean Hanley

Although only three EU members in Central and Eastern Europe (CEE), Estonia, Slovakia and Slovenia, have adopted the Euro, the knock-on  effects of stagnation in the Eurozone has pushed governments across CEE towards unpopular austerity programmes, exacerbating social tensions and collapsing support for incumbent parties. The uncertainties about the EU’s future are also undermining mainstream parties in the region. Politicians can no longer sell liberal reforms as part of a successful, tried and tested european model as they once did, when that model is itself in crisis. For many this seems to point darkly towards a turning away from liberal politics in CEE and a growth in euroscepticism, populism and nationalism. (more…)

Fieldwork interviews in Eastern Europe can make big demands of young researchers. Careful preparation, creativity and persistence are the key to success, argue Erin Marie Saltman and Philipp Köker.

Interviews are commonly used across a variety of disciplines – from anthropology to political science, from linguistics to economics.Sometimes, they are the only way to gain important information and, even when they are used alongside other research methods, can give researchers unique insights

However, despite the added value they can bring, conducting interviews is often a more or less a self-taught skill. While there are a few text books, these often remain general, sometimes leaving researchers with more questions than they started with. Courses offered by UCL cover interviewing more directly, but nothing quite prepares research students for using this method in the field.

Given the region’s history, people in Eastern Europe can also be suspicious of (foreign) researchers inquiring about their daily lives or political views. Structures like parties or civil society organisations are sometimes not yet well established enough or sufficiently attuned to help researchers find and contact potential interviewees. And even if you get an interview, the fact that even top politicians and experts often do not speak foreign languages makes interviewing more complicated (although admittedly, this can also be an issue in Western democracies). (more…)

 Allan Sikk finds that a new book on the Baltic-EU relationship has excellent insights into micro-processes of accession relevant to anyone interested in how states respond to EU pressures and adapt to EU membership.

Could the experience of Lithuania, Latvia and Estonia joining the European Union be relevant for the UK? Differences seem to abound – the Baltic states are small, rather remote and their recent historical experiences are obviously very different. However, at a closer look one discovers that the UK and the Baltic states share certain perspectives of the world and even the EU (despite the British elites remaining far more Eurosceptic than their Baltic counterparts). More crucially, both the UK and the Baltic states have a shared affinity to the Nordic countries – an obvious source of inspiration for the Baltic states, but increasingly also for Britain.

Recently, the Prime Ministers of the UK, the Nordic and the Baltic states have twice met for UK-Nordic Baltic summits, initiated by David Cameron in 2011. For someone with an academic interest in Baltic and Nordic affairs, the links are obvious; together with three colleagues at University College London we started an ESRC seminar series on Nordic and Baltic countries a year prior to Cameron’s initiative.

Bengt Jacobsson’s new edited collection The European Union and the Baltic States: Changing forms of governance. (Routledge. 2010) addresses the issue of how domestic politics, more specifically central state administration, has been shaped by the EU accession. Its aim is to go beyond a crude notion of conditionality: that the rewards of membership force states to undertake specific reforms.

Some of the critique of conditionality literature in the opening chapters may be on the harsh side, but the book does provide original insights. It focusses on micro-processes and soft forms of influence – where aspiring member states adapted to formal requirements and, perhaps more importantly, to the Western ways of doing things according to the logic of appropriateness, termed (somewhat cryptically) ‘scripts’. (more…)