EU structural and cohesion funds: an additional mission is badly needed!Publish date: 28-09-2009
The economic downturn is taking a very heavy toll worldwide. Many emerging economies have seen their prospects of economic growth brutally reduced. To paraphrase one of Paul Krugams's bestsellers, we are entering an age of diminished expectations. Central and Eastern Europe is one of the worst hit regions. Except Poland, its economies have tumbled at a very quick pace while budget deficits have been soaring.
The trade and financial shocks have compounded internal difficulties (and previous policy mistakes) and made budget revenues collapse in NMSs. For most of the EU economies which do not belong to the eurozone the forex constraint has returned as an overwhelming concern of policy-makers. This state of affairs has brought back the IMF and other IFIs, on a grand scale, into the picture -stabilisation programs, which are based on their financial support, has become almost a must in several NMSs for the sake of averting worst case scenarios (such as a sovereign default).
There are significant differences among EU new member stastes (NMSs). Some of these differences are rooted in dissimilar exchange rate and monetary policy arrangements; some countries (Latvia, Lithuania, Estonia, Bulgaria) peg their currencies (via currency boards), while others float. Likewise, different histories of economic/budget policy also matter in the architecture of stabilization programs, which is illustrated by the room of policy maneuver. But, though pain is unevenly distributed among NMSs, all of them do suffer considerably.
Currency boards raise a huge challenge when it comes to the capacity for absorbing shocks and undertaking adjustments. Unless markets (labor market included) are very flexible shocks care hardly be absorbed and the exchange rate and monetary policy arrangements become untenable. The policy dilemma in the Baltic countries (and not least Bulgaria) relates to their capacity to adjust to the new international context by improving competitiveness fast enough. This is why some argue that devaluation is an option not to be discarded, though others point at the ubiquitous wealth effect of such a move (because of heavy euroization) and the further erosion of banks' balance-sheets. All in all, peggers are under extreme strain.
Floaters are also facing major challenges for their budget revenues have also come down dramatically. Much hope is pinned down on economic recovery in France, Germany and other old EU member countries. But unless that recovery gets real not much traction should be expected. The economic downturn adds new pressure on banks, which face a real conundrum. They are in a process of deleveraging (driven by parent banks from outside the Region), which limits their propensity to lend.
At the same time, not caring about their clients would make the economic recession worse. The Vienna initiative (which has brought together banks, governments, the EC and IFIs) has tried to induce banks to roll over debts of their clients so that a total breakdown of financial intermediation be averted. But the problem remains, for credit markets are functioning quite precariously, which suffocates many local companies.
The freeze of credit markets in the NMSs and their collapsing budget revenues have reduced the ability to use EU funds. At the start of this year the European Commission simplified procedures for the absorption of UE funds. But this is not sufficient in view of the intensity of the economic downturn. Moreover, the IFIs based programs have not escaped being pro-cyclical albeit the IMF has shown a substantial amount of flexibility in their design. The stark fact is that these programs are pro-cyclical at a time when international markets have been on a downward spiral and private sector activity is compressing; and this is happening when governments in many EU countries, in the US and Asia use budget instruments and monetary policy counter-cyclically in order to mitigate the effects of the crisis. Pro-cyclicality is a disturbing feature of these programs.
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