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International Monetary Fund. European Dept.

features of CESEE economies that might explain these gaps. While there is no magic formula for fast convergence, the hope is that this chapter will provide some insights for ongoing policy discussions in the region on how to get back on a fast convergence track. A. Historical Perspective 1. High-Speed Convergence History shows that fast-track convergence is possible, but it still takes several decades . There are a few examples of successful and rapid catch-up with advanced economies from the starting per capita income levels that are comparable with the

International Monetary Fund

P: the problems in Greece can have significant spillover effects beyond its cluster insofar as its gatekeepers—Italy and Germany—are adversely impacted. If the gatekeepers become vulnerable, e.g., if Italy lacks adequate policy buffers and comes under stress, then the problems could spill over widely, given Italy’s connections across Europe, the Middle East, Central Asia, and sub Saharan Africa. Group O: Italy is a gatekeeper, along with Germany and Austria, into some CESEE economies ( Figure 6 ). Stresses in Italy could have a direct adverse impact. Figure 6

International Monetary Fund. European Dept.

Europe. The exception is public investment, where CESEE economies outspend Advanced Europe by a substantial margin (as a share of potential GDP). Disaggregating spending by sub-region shows that Turkey differs from the rest of CESEE, with relatively smaller shares in transfers and public consumption, in line with its smaller overall spending levels. Also in the Baltic countries, transfers are below the CESEE average. Revenues . The discrepancies with Advanced Europe are larger on the revenue side. CESEE governments tend to raise a higher share of revenue from

International Monetary Fund. European Dept.

improve the business environment and address structural weaknesses. This is not to deny that there is still a lot of uncertainty about the strength of global recovery that, domestically, inflation is still too low in many CESEE economies, and that the key crisis legacies—high NPLs and debt overhangs—still need further work (notably in SEE). For economies that are in recession (Russia and other CIS countries), the key challenge is to steer the adjustment to terms-of-trade and other shocks with a view to supporting weak internal demand and reducing high inflation

Jiri Podpiera, Ms. Faezeh Raei, and Ara Stepanyan
Was the postcrisis growth slowdown in Central, Eastern and Southeastern Europe (CESEE) structural or cyclical? We use three different methods—production function approach, basic multivariate filter, and multivariate filter with financial frictions—to evaluate potential growth and output gaps for 18 CESEE countries during 2000-15. Our findings suggest that potential growth weakened significantly after the crisis across most countries in the region. This decline appears to be largely due to stagnant productivity and weaker capital accumulation, which were associated with common external factors, including trading partners’ slow potential growth, but also decline in global trade and stalled expansion of global value chains. Our estimates suggest that output gaps in 2015 were largely closed in many countries in the region.
International Monetary Fund. European Dept.

consumed by China is less than 2 percent of CESEE countries’ GDP (see Figure). Russia and those CESEE economies that are more integrated into the global supply chains (the Czech and Slovak Republics, and Hungary) are most exposed. This suggests that—in the absence of any impact of China’s slowdown on investor confidence and risk premiums—the impact on CESEE would be small. Figure. CESEE: Domestic Value-Added Embodied in Chinese Final Demand, 2011 (Percent of GDP of exporting country) Source: OECD-WTO Trade in Value Added (TIVA) dataset. Model simulations

International Monetary Fund. European Dept.

prospects, structural reforms are critical to lift potential growth and re-accelerate convergence . In the absence of negative shocks, supportive monetary policy and medium-term fiscal consolidation is an appropriate policy mix for many CESEE economies : Monetary policy should stay accommodative in low-inflation countries with further rate cuts if inflation expectations continue to decline or interest rate differentials with the euro area widen. There are, however, many countries in the region, where conventional monetary policy space is limited: because they

Nazim Belhocine, Ernesto Crivelli, Ms. Nan Geng, Tiberiu Scutaru, Mr. Johannes Wiegand, and Zaijin Zhan
The demands on monetary and exchange rate regimes in CESEE have evolved, in line with the region’s development. In the 1990s, the immediate challenge was to rein in excessive inflation following transition, and to establish basic monetary order. These objectives have been achieved, owing largely to successful exchange rate–based stabilization. With this accomplished, the focus has shifted to cyclical monetary management, and to appropriately managing monetary conditions during CESEE’s growth and income convergence to the euro area. Flexible exchange rates—and the ensuing capacity of monetary conditions to adapt to the economies’ needs—are likely to remain advantages, especially to extent that CESEE’s GDP and income levels will resume convergence to the euro area. Once this process restarts, tighter monetary conditions will again be needed to limit goods and asset price inflation, and to contain growth imbalances.