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EU10 Regular Economic Report November 2011

  • At the beginning of the year, EU10 countries were looking forward to an acceleration of growth and progress on fiscal consolidation supported by a rebound in private domestic demand, an increase in credit growth, a decline in unemployment and a stable external environment.

  • We start with the strong points. First, regional growth in 2011 has been solid. The EU10 region has taken advantage of its openness, and supported growth through a strong expansion in exports. Second, Estonia, Lithuania and Latvia, the growth laggards in 2009, have turned within two years into growth leaders, reaping the benefits of the flexibility of their economies
  • These achievements are impressive, as they have come in spite of a fair share of disappointments. The external environment has been more challenging than hoped for, especially in the second half of the year. Growth of the global economy is losing momentum, and the expansion in the EU15 is grinding to a halt towards the end of the year, as the sovereign debt crisis originating from the periphery of the euro area continues to rattle financial markets.
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Recent Developments and Future Prospects

The economic recovery in the EU10 is slowing down as the global economy has been pounded by a series of shocks. An earthquake and tsunami in Japan, high oil prices, strains in financial and sovereign debt markets of the euro area, and the slowing recovery in the US have dampened global economic activity, which was already under pressure from the end of the inventory cycle and fiscal consolidation. As a result, the economic sentiment in key OECD countries deteriorated during the course of the year. Driven by weaker performance of high income countries, growth of the global economy is set to slow down in 2011...
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Monetary policy is likely to remain supportive for growth. The ongoing tensions in Europe’s financial markets have tightened financing conditions and undermined confidence, which are likely to dampen the pace of economic growth in the EU10 in late 2011 and beyond. The slowdown of the global economy is likely to moderate international commodity prices. With weak domestic and international demand, inflation rates are expected to go down, in spite of selective increases in indirect taxes and administered prices and exchange rate depreciation for some countries. At the same time, most countries have little room to slow the pace of fiscal consolidation in light of market pressures and large fiscal imbalances. Instead, monetary policy might be better suited to respond to the weaker economic outlook. Central banks might keep on hold further increases in policy rates, or even reduce them, as the economic recovery is losing strength and inflation pressures are receding...
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In Focus: Skills, Not Just Diplomas

As EU10 governments are struggling to respond to high unemployment and low labor productivity, there is a renewed urgency in addressing the skills gap. Along with measures to strengthen labor market and structural policies, education policies are central in tackling skills mismatch. This note discusses that better information is vital for government to reform the education system in order to bridge the skills gap.

Paradoxically, for a region with relatively high and expanding educational attainment (as measured by the number of years of completed schooling) and relatively high-quality education in the early years of schooling, a shortage of worker skills has emerged as one of the most important constraints to firm expansion in the countries in EU10. A recent regional World Bank publication entitled “Skills, Not Just Diplomas” looks at the 29 countries located in Eastern Europe and Central Asia (ECA) and seeks to answer the questions: Why do ECA firms increasingly complain that they cannot find graduates with the right skills? What can ECA countries do to close the skills gap?...
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Full Report
Croatia Supplement
EU10 Countries

Eight Central European countries joined the EU in 2004: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic and Slovenia. Bulgaria and Romania joined the EU in 2007. Croatia began EU accession negotiations in October 2005.

Previous Reports
Related Links
Press Release: 
Securing EU10 Economic Recovery Amid Headwinds
(Nov. 16, 2011)
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