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

 

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…)

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…)

1989 in fiction: a story that is not a story

By Blog Admin, on 17 November 2012

Tim Beasley-Murray on a story that slips under the radar of history

Pictures of 1989 - Exterior

Photo: Gribsche (Rob Sinclair). Creative Commons license via Flickr

Peter Pišťanek’s Rivers of Babylon is the best-selling Slovak novel of all time.  It tells the story of Rácz, a peasant from the Hungarian- speaking countryside, who arrives in Bratislava in Autumn 1989 and finds a job stoking up the boilers of the city’s top hotel.  With a combination of priapic brutality, Nietzschean will-to-power, and control of the heating in a freezing winter, he rises with meteoric speed to become, by the summer 1990, the head of a criminal empire, with the Hotel Ambassador, the city and its politicians in his pocket.

 This riotous and irrepressible novel is a combination of things: a video-nasty subversion of the Bildungsroman; a vicious satire of (Slovak) notions of the ethnic and moral purity of the countryside and the corruption and vice of the city (after all, it is Rácz who corrupts the city and not the other way round); and, with its cast of ballet-dancers-turned-prostitutes, intellectuals-turned-pornographers, secret policemen-turned-mafiosi and so forth, a Rabelaisian carnival of the birth of wild-East capitalism.

One of the most remarkable things about this remarkable book, however, is what it does not portray:  Rácz meteoric rise coincides exactly with the period that sees the fall of the Berlin Wall, mass demonstrations in November against the Communist regime in Prague and Bratislava, the resignation of the Presidium of the Czechoslovak Communist Party and the election of Václav Havel to the presidency at the end of December, and finally, in June, the first free elections in Czechoslovakia since 1946.  None of this appears in the novel.

(more…)

Does the eurozone crisis threaten liberal reforms in Eastern Europe?

By Blog Admin, on 15 November 2012

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

OccupyFrankfurt October 2011 EZB

Photo: Blogotron via Wikicommons

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: From phonebooks to fascists

By Blog Admin, on 8 November 2012

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.

Ringbound notebook

Photo: Sikura via Wikicommons

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…)

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…)