World Bank Projects Sharp Slowdown for the South East European Economies in 2012

June 5, 2012

Growth to slow from 2.2 percent in 2011 to 1.1 percent in 2012

Skopje, June 05, 2012–Six countries in South East Europe (SEE6)1   face a sharp slowdown in growth in 2012 amid heightened uncertainties in the Eurozone, says a new World Bank report released today. In the short term, the report says that several countries must implement sustained fiscal consolidation to reverse adverse debt dynamics and establish a basis for more dynamic, long-term growth. At the same time, the countries are facing a considerable structural reform agenda to improve productivity and competitiveness and reform their labor markets and public sectors.
After 2.2 percent growth in 2011, early indications are that Southeast Europe’s six (SEE6) countries are experiencing a significant slowdown to 1.1 percent growth in 2012,” says Željko Bogetić, Lead Economist for the Western Balkans at the World Bank, and author of the South East Europe Regular Economic Report No. 2 (SEE RER), the second of a series of regular bi-annual reports.“Weak economic conditions in the Eurozone have exerted a drag on domestic demand, trade, and government revenues in SEE6 countries.”

While the drop to 1 percent growth would mark a sharp slowdown, Bogetić also emphasized that the figure could be worse, depending on how the Greek economic crisis is resolved.

 “Importantly, this baseline projection assumes an orderly resolution of the Greek crisis and a containment of the broader contagion. Hence the importance of strengthening fiscal and financial buffers in all countries.”

With high levels of public debt and financing pressures, most countries have to adopt significant fiscal consolidation programs.

This is the key short-term policy challenge for countries whose public debt-to-GDP ratio has been increasing rapidly,” says Bogetić, emphasizing that “economic policy must strike a balance between the need to improve public finances and reduce macroeconomic vulnerabilities, on the one hand, and strengthen the economic policy environment for investment, growth, and jobs, on the other.“

The financial sector in SEE6 remains relatively well placed, but risks are elevated, especially given a high risk of a broader contagion from the Greek crisis. The importance of the authorities continuing to take pro-active measures to require banks to build buffers and strengthen the resilience of the sector cannot be overemphasized.

Policymakers should especially take note of the difficult social situation and related trends: SEE6 countries are experiencing the highest unemployment and poverty rates in Europe.

Growth was weak and largely “jobless” during the nascent recovery in 2010-11. Poverty reduction gains from the pre-crisis period are being reversed, and the middle class has become more vulnerable, according to both objective and subjective indicators of welfare.

 In the face of much more moderate growth prospects than before the crisis and high social pressures, SEE6 country governments should adopt a more ambitious and urgent structural reform agenda for growth and jobs.

In the longer-term, however, SEE6 countries face a historic opportunity to take advantage of the European “convergence train”––a reduction in the long-term per capita income gap with developed, “core’ European Union (EU) countries. All earlier entrants into the EU experienced this strong “catch up.” The same “convergence train” awaits new EU candidate countries among SEE6, but only with appropriate policies and reforms.

The SEE6 long-term structural reform agenda must be focused on leveraging greater trade and financial flows and, especially, on reforming labor markets and the public sectors,” says Jane Armitage, World Bank Country Director and Regional Coordinator for South East Europe.

The special feature of the report is the focus on long-term prospects for convergence of SEE6 countries with the developed European countries and associated policy challenges

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