A A A

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

 

fig 1

 

 

 

 

 

 

 

 

 

 

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)

fig 2

 

 

 

 

 

 

 

 

 

 

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.

 

SSEES RB logo

 

Roundtable Discussion on Jobbik and the Hungarian Far Right

By Blog Admin, on 18 March 2016

 

Logo for Jobbik. Source: Wikimedia commons

As a result of the electoral successes of Viktor Orban’s governing FIDESZ-KDNP coalition in 2010 and 2014, Hungarian politics has experienced a dramatic shift to the Right.  One beneficiary of this rightward shift is Jobbik, the Movement for a Better Hungary, which is now the leading opposition party with the support (according to opinion polls) of about one-fifth of the probable Hungarian electorate.

Formed in 2003 by university students in Budapest, Jobbik can be placed in a long tradition of right radical parties in Hungary that stretches back to the Hungary Justice and Life Party (MIÉP) that obtained parliamentary representation in the 1990s, to the interwar Party of Hungarian Life (Magyar Élet Pártja) and to the pre-First World War Catholic and Nationalist Parties such as the Catholic People’s Party, The Slovak People’s Party, as well as Europe’s first antisemitic party, the Országos Antiszemita Párt, founded in the 1880s. Jobbik has also been compared to Ferenc Szálasi’s ‘Arrow Cross Movement’, which briefly seized power in October 1944, even though the ideological differences between these two parties are substantial. Certainly, all of these parties, including Jobbik, can be seen as recurring examples of the enduring clash between populist/rural/antisemitic nationalists and an allegedly cosmopolitan/urban/liberal elite sometimes referred to as the népi-urbánus debate. This debate has been an important fault line in Hungarian politics since at least the middle of the nineteenth century.

On Wednesday, 24 February, five young academics from Britain, Hungary and Romania presented short papers at a well-attended roundtable organized by SSEES’s Centre for the Study of Central Europe, held at SSEES and chaired by myself (Thomas Lorman), which shed some light on the ideological roots and future prospects of Hungarian right radicalism in general and Jobbik in particular.

(more…)

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…)

Storming the Winter Palace

By Blog Admin, on 20 December 2013

Storming the Winter Palace, a SSEES languages and culture photo competition on the theme of Russian and East European London, led students and staff to contemplate cultural resonances, contemporary identities and stereotypes – and language-learning opportunities! In the final post of the year on the SSEES Research Blog, Sarah Young introduces a selection of entries. Commentaries are by the photographers, unless otherwise stated.

Harbry Ellerby’s photograph of the Hungarian stall in Camden reminds Eszter Tarsoly that every encounter with Eastern European food in London invites us to reflect on cultural exchange, language, and translation:

Harbry Ellerby: Hungarian stall in Camden

Harbry Ellerby: Hungarian stall in Camden

The photographer took this shot in front of the Hungarian stall in Camden Town. The food on sale here, instead of the grilled sausages more usual on Polish and other East European stands, is lángos, a deep-fried flat bread whose dough is similar to that of pizza. It is traditionally seasoned with garlic and tejföl, a wide-spread diary product in Eastern Europe known in various guises in the region (e.g. Romanian smântână and Czech smetana) and most similar perhaps to soured-cream. How much a simple, hearty food – particularly recommended after a long, hearty night – can teach us about translation! The man’s silouette in front of the stall and the hanging flower baskets are revealing: the image, while entirely authentic, could have been taken only on a somewhat manicured market. This video clip of the song ’Lángos, tejföl’ by the band Kaukázus shows how lángos is enjoyed in Hungary.

Seeing a street sign commemorating one of the many Eastern European revolutionaries who lived in London during the nineteenth century, Eszter Tarsoly‘s thoughts turn to today’s immigrants:

Eszter Tarsoly: Kossuth Street: a Cul-de Sac

Eszter Tarsoly: Kossuth Street: a Cul-de Sac

In a quiet, respectable, yet exhilarating corner of Greenwich stretches a modest Cul-de-Sac called Kossuth Street, named after Hungary’s larger-than-life revolutionary hero, one of the driving forces behind the 1848-49 Revolution and War of Independence. Lajos Kossuth, after the demise of that Revolution, resided briefly in Britain, and legend has it that he stunned English-speaking audiences with his knowledge of English acquired in prison, or rather, with the kind of English he had acquired (only from written texts) in prison. We do not know exactly what Kossuth’s English was like. But not far from Kossuth Street, just across the Thames near Limehouse basin, there are entire blocks of flats inhabited almost exclusively by Kossuth’s contemporary compatriots, sharing overcrowded accommodation, having little hope – in the absence of knowing good English or who knows what other skills – to move on. A dead end…?

The reality of contemporary immigration from Eastern Europe is the subject of the first of two photographs by Ger Duijzings:

Ger Duijzings: Automatic Door

Ger Duijzings: Automatic Door

This image was taken during a cold night in February 2012 at just after 3 in the morning, at a bank branch opposite Victoria Station. Together with my research student Cezar Macarie I was doing a night walk around the area. Underneath a row of ‘fast, easy, and convenient’ cashpoints, in the glass protected bank area, a dozen or so Poles and Romanians are sleeping rough. As it is outside of official opening hours, the automatic door is kept open by a traffic cone. A Pole smoking a cigarette in front told us that he had been working in London for seven years, the first five years on a contract, but the last two working on-and-off.

Ger Duijzings’ second entry confronts insular British views of Europe and the question of what ‘Eastern Europe’ means in this country:

Ger Duijzings: SKY for Eastern Europe

Ger Duijzings: SKY for Eastern Europe

A quick snap shot taken at the end of November 2007 at Luton Airport which shows how outdoor advertising at UK airports targets low-budget travellers from East Europe. I had just returned from one of my frequent commutes to so-called ‘Eastern’ Europe which for some natives in the British isles apparently starts just across the North Sea. I took the photo from the inside of a bus waiting to take me into Central London. A lone individual is about to put his luggage into the belly of a bus: it may have been an East European guest worker or student, perhaps. The cold and grey image has the impersonal and slightly gloomy quality of what Marc Augé would call a ‘non-place’.

(more…)

Stuck in transition?

By Blog Admin, on 20 December 2013

Economic reform in Eastern Europe and the former USSR is stagnating suggests the latest Transition Report from the European Bank for Reconstruction and Development (EBRD).  However, as debates at a joint EBRD/UCL-SSEES launch event highlight, the responses needed may not be straightforward, reports Randolph Bruno

The idea that some countries are Stuck in Transition – to take the title of the EBRD’s 2013 Transition Report – has resonated for some time in the literature. It is now it is time to take stock and ask whether transition is really over – at least for some countries.

The 2013 EBRD Transition report tries to address this by asking two main questions. Firstly, why has convergence slowed? The standard of living of the best performing countries in Eastern Europe is still around 60-70% of the average for rich Western European countries. Secondly, can economic institutions be improved if there are constraints on political reform– a question which could also be asked in a very similar fashion of Western European countries. As far as the first question is concerned, the data clearly shows an end to the productivity catch-up (moving closer to the EU average) observed at the turn of the millennium.

Why should this be the case? One possible answer is stalled political reform. The up-to- EBRD transition indicators in the Report show political reforms plateau-ing and this is worrying. The attitude of the citizens in transition states shifted in 2006-2010, basically dropping the consensus that the market economy is a good mechanism for allocating resources.

Reforms matter

However, the main element is the increase in the so called Total Factor Productivity – productivity derived from the increase in efficiency not accounted by factors of production such capital and labour. In other words, the injection of new capital or new labour has a very limited impact on productivity whereas new technology and innovation play a major role.

The EBRD downgrades of the top reformers’ rankings are concentrated in the EU countries and with the current policy convergence will slow. However, the other side of the coin is that if economic reforms are improved convergence will improve. On this point the EBRD Transition Report is very clear: keep going with reform –or re-start reform- and this can make a substantial difference. Still more worryingly, in some cases (for example in Belarus) reforms have been reversed. (more…)

Premature donors? Development aid from Central and Eastern Europe ten years on

By Blog Admin, on 28 November 2013

St. Philip's School Mathare: support and development of the school’s potential, KenyaWhen they joined the EU Central and East European states committed themselves to meet EU norms on international development aid. Small budgets, weak social support and limited political commitment have so far limited the impact of aid from CEE. However, it is too early to dismiss them as ‘premature donors’ argue Simon Lightfoot and Balazs Szent-Ivanyi.

Eastern Europe (CEE) states becoming donors of international development aid. It is also the year that three CEE states – the Czech Republic, Slovakia and Poland – joined the OECD’s Development Assistance Committee (DAC).  DAC membership is symbolically important of joining the ‘donor’s club’, but it also commits members to certain norms and practices in aid spending.  Both events make this an opportune time to review the progress CEE states have made towards meeting global aid norms.

Before we do that it is worth asking whether these countries are ready to become donors.  They classify as high income countries and are number are OECD members, so economically the answer must be yes, despite the impact of the financial crisis on some CEE states. But socially, the self perception of these societies is that they see themselves are poor and awareness of development issues is low, so the answer here is more complicated. And politically, aid is not seen as a salient issue, so there is little political capital gained by ‘selling aid’ to the public.

All of these factors affect the quantity, quality and allocation of the bilateral aid given by the CEE states. On becoming EU members, the CEE states were set quantitative targets for aid as a percentage of GDP. They committed to providing 0.15% by 2010 with the ultimate goal of 0.33% by 2015. No country met the 0.15% target and most are unlikely to meet the 0.33% target. However, given the economic problems of the Eurozone, a number of the other DAC members are similarly unlikely to meet their own targets for aid, with aid levels in Greece and Italy particularly badly hit.

But quantitative targets, while important, do not tell the whole story. (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…)

Chicago of the Balkans: Budapest in Hungarian literature 1900-1939

By Blog Admin, on 27 June 2013

József körút (Boulevard), c. 1935, Pest as the centre of the press

József körút (Boulevard), c. 1935:
Pest as the centre of the press (CC BY-NC-SA 3.0)

From the golden age of Hungarian Jewish culture to inter-war anti-semitism, Budapest is constantly being rewritten, finds Gwen Jones.

Writing in 1910, a good decade before Al Capone and associates attained international notoriety, the Hungarian critic and arts patron Lajos Hatvany (1880-1961) introduced an imaginary Western European reader to the latest developments in his country’s culture and history. Tracing Hungary’s elevation following the 1867 Compromise with Austria, from ‘a rudimentary agricultural people to a higher rank’, into the era of economic growth and progress, he suggested that the country was not merely Europeanizing, it was Americanizing: ‘Budapest will become the Chicago of the Balkans’.

My book takes its title from Hatvany’s ironic remark, and discusses the ways in which Hungarian intellectuals viewed and wrote about their capital city from the turn of the twentieth century until the outbreak of World War Two. Referring to the speed with which Budapest grew in the last quarter of the nineteenth century, and contrasting this with a dusty ‘Balkan’ backwardness on the periphery, Hatvany placed the Hungarian capital within an absurd contradiction. In this, he was far from alone.

While compiling the book’s index, which was by far the most entertaining part of the entire writing process, I began by listing references to ‘Budapest is Hungarian’, and then for ‘Budapest is not Hungarian’. Next, I compiled various images writers had used to describe the city over this forty-year period. Budapest had been compared to, among other things, Babel, Babylon and Sodom. It was a ‘New Jerusalem’ built by Jews, and ‘Judapest’, the latter description attributed to Karl Lueger, who was mayor of Vienna from 1897 to 1910. Budapest was the Hungarian Paris, a muse, a parvenu, a Potemkinopolis, a whore and a volcano. Moreover, the Buda side was stuffy and conservative, much like an elderly uncle, while Pest, the centre of commerce, journalism and cabaret, was a cocotte, a fashionable prostitute. In the words of Rezső Seress’s popular interwar chanson, Hiába van palotád Budán, ‘No point your having a villa in Buda, it’s Pest where you go for fun’. (more…)

Eastern Europe: Parties and the mirage of technocracy

By Blog Admin, on 16 May 2013

Non-party technocratic governments of experts have stepped in to fill a political gap in several European countries. But in East and Central Europe they are not always what they seem, writes Seán Hanley

Many commentators saw the governments of non-party technocrats formed in Greece and Italy in 2011 as an ill omen for development of party-based democracy in Europe. Established parties, it is suggested, are turning to technocratic caretaker administrations as a device to manage economic and political crisis, which allows them both to duck (or least share) responsibility for painful austerity measures. Such non-partisan governments of experts, it is argued, can only widen the yawning the legitimacy gap between governors and governed.

 Technocratically-imposed austerity backed by big established parties can further undermine party democracy by provoking anti-elite electoral backlashes:  the rise of new populist parties or breakthroughs by previously marginal radical groups. This in turn, makes coalition formation difficult and further rounds of caretaker government or awkward left-right co-operation more likely. The success of the Five Star Movement in Italy and its difficult political aftermath, which has finally resulted in an implausible Grand Coalition, seems to illustrate this scenario perfectly. Sometimes, caretaker technocrats themselves even add to the uncertainty, revolting against their erstwhile masters and founding their own new parties.

 How has the drift towards technocratic crisis management impacted Central and Eastern Europe?  The region is sometimes grouped with debt- and crisis-afflicted Southern Europe states as an economically weak periphery of flawed and potentially unstable democracies, where technocratic crisis governments are the order of the day.

And not without reason. In March this year the President of Bulgaria Rosen Plevneliev appointed a technocratic caretaker government to lead the country to early elections on 12 May following the resignation of prime minister Boyko Borisov in the face of street protests against poverty, high utility prices and corruption. Hungary had a year-long technocrat-led government in 2009-11, as did the Czech Republic in 2009-10 following the fall the centre-right minority government of Miroslav Topolánek. Meanwhile, Slovenia – one of three CEE states in the Eurozone – is set for a Southern European-style bailout following the downgrading of its bonds to junk status with undoubted domestic ramifications. (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…)