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About this book

This edited volume analyses the channels through which EU membership contributed to the convergence process of member countries in the Baltics, Central-Eastern and South-Eastern Europe. These channels include trade, investment, finance, labour, and laws and institutions. Global integration has certainly played an important role. A large part of FDI flows and financial integration in the world have been persistent features of globalization. Have these countries experienced more intensive integration through these channels because of EU membership, with its much tighter institutional and political anchorage, than their fundamentals and global trends would suggest? Contributions by lead researchers of the area address different aspects of this question. .

Table of Contents

Frontmatter

Chapter 1. Introduction: The Working of the Channels of Interaction Between the EU and the EU11 Member States

Abstract
Starting on 1 May 2004, 11 countries in Central-Eastern and South-Eastern Europe and in the Baltics (EU11) joined the European Union (EU) in three consecutive waves. Half a generation later, and a full generation after the start of transition in the region, we thought it would be opportune to look into the convergence experience of these countries. The two volumes of this book offer a collection of contributions on this matter.
Michael Landesmann, István P. Székely

Trade and Investment Channels

Frontmatter

Chapter 2. The Economic Impact of Single Market Membership on the EU Enlargement Countries

Abstract
This chapter examines the macroeconomic benefits that membership of the Single Market has given to the 11 Baltics, Central and South Eastern European countries that joined the EU after 2004. We find that these EU11 countries have benefitted particularly from membership of the internal market because of their high degree of openness and their strong trade integration within the EU. The analysis is conducted with the macroeconomic model QUEST that distinguishes between all EU member states and the rest of the world. We capture both the direct welfare effects for consumers from the reduction of tariffs and non-tariff barriers but we also consider indirect effects on income which work via labour supply, the decline of capital costs for firms and effects on EU value chains via lower prices for intermediates. GDP effects depend heavily on the degree of openness with respect to intra-EU trade. We find GDP effects which are in the middle of effects estimated in ex ante studies.
Werner Roeger, Jan in ’t Veld

Chapter 3. FDI as Force of Convergence in the CESEE Countries

Abstract
Trade and access to international capital markets are often assumed to support countries’ development, notably through technology transfers that support convergence. In this chapter we review economic developments in the EU Central, Eastern and Southeastern (CESEE) countries (namely Bulgaria, Croatia, Czechia, Estonia, Latvia, Lithuania, Malta, Poland, Romania, Slovenia and Slovakia) since the late 1990s, linking their take-off to the opening to trade and infusion of foreign direct investment (FDI), largely facilitated by the EU accession and geographical proximity. The region has had one of the most significant growth of foreign investment as a share of GDP in the recent global history, and this has contributed to productivity convergence. We argue that FDI increased the well-being of people, by bringing in new jobs and higher wages, led to technological spillovers to domestic firms and increased efficiency and innovation in the market. Various trade-offs, particularly regarding the political implications of privatising national resources, repatriating profits and agglomeration effects are also acknowledged. We conclude that FDI can act as a force of growth and convergence when it comes alongside with a strong institutional, legal and regulatory environment, on the likes of the EU Single Market.
Septimiu Szabo, Jorge Durán Laguna

Chapter 4. The Impact of EU Cohesion Funds on Macroeconomic Developments in the Visegrád Countries After the 2008–2009 Financial Crisis

Abstract
This chapter investigates how cohesion funds were spent and how these funds impacted economic developments in the Visegrád countries (Czechia, Hungary, Poland, Slovakia) on short, medium and long terms. Czechia has been the most developed country in the region, Poland and Slovakia were dynamically converging to the European average while the latter also joined the euro-zone and Hungary has significantly improved its external and internal imbalances.
The analysis shows that the sizable spending from cohesion funds had a major impact on growth, investment, external and fiscal conditions. Cohesion funds generally have their primary economic impact throughout investments (both public and private). Funds aim to increase the country’s growth potential in the long run. Spending on competitiveness (R&D, education, health, etc.) might have smaller impact on short term but can have significant long-term effect because it provides more attractive conditions for private investments. While on the other hand, financing private projects can generate significant impact on the short term but the additional impact dissipates quickly. The increased growth potential can generate additional tax revenues in the long term.
Adam Czelleng, Andras Vertes

Chapter 5. The Impact of the EU Cohesion Policy Spending: A Model-Based Assessment

Abstract
EU cohesion policy supports investment in infrastructure, R&D and human capital in Europe’s poorer regions. This chapter summarises model-based assessments of the potential macro-economic impact of these fiscal transfers using a micro-founded dynamic general equilibrium model with semi-endogenous growth and human capital accumulation. It gives an overview of total cohesion spending over the three programme periods from 2000 to 2020. The simulations show the potential benefits of Structural Funds with significant output gains in the long run due to sizeable productivity improvements.
János Varga, Jan in ’t Veld

Finance Channel and Financial Institutions

Frontmatter

Chapter 6. Models of Financial Integration: The Experience of the Baltics and Central Eastern Europe

Abstract
Building on Vinhas de Souza (and Vinhas de Souza and Tudela), this chapter briefly describes the historical process of financial liberalization and integration of Baltic and Central European Countries (BCECs) since the 1990s. It investigates the hypotheses that the type of financial integration chosen by the BCECs played an important role in enabling liberalization to deliver welfare-enhancing outcomes.
Lúcio Vinhas de Souza

Chapter 7. 15 Years from the Eastern Enlargement: Financial Integration and Economic Convergence in Europe

Abstract
Central Eastern European Countries (CEECs) went through a process of deep financial integration with advanced European countries, spurred by the entry in the European Union. Financial integration took place through an unprecedented entry of foreign banks in local banking markets, which led to a rapid expansion of credit and often credit booms. The global financial crisis produced a bust of these booms, with severe effects on the real economy. These dynamics raised the question of whether CEECs experienced a phenomenon of “too much credit” or “too much credit growth.”
This chapter investigated whether and how the pattern of credit boom and bust affected the productivity of the economy of CEECs through the efficiency of resource allocation within sectors. We found that rapid credit growth exerted negative effects on efficiency in old EU members, but not in CEECs, suggesting that part of the rapid credit growth in CEECs prior to the global financial crisis was an equilibrium phenomenon. Our analysis does not rule out that inefficiencies of rapid credit growth were present also in CEECs in the allocation of resources across sectors and not within sectors.
Fabrizio Coricelli, Marco Frigerio

Migration Channel and Labour Market Institutions

Frontmatter

Chapter 8. Labour Markets, Demography, Migration and Skills

Abstract
This chapter reviews labour market developments pre- and post-EU Enlargement in the Central-Eastern and South-Eastern European (CESEE) countries. During the post-transition phase CESEE economies went through dramatic processes of structural change (deindustrialisation, tertiarisation, uneven regional development, etc.). Such industrial and regional structural change had strong implications for labour demand and the demand for skills. Furthermore, migration flows and other demographic developments affected the available labour supply. This chapter analyses these developments, their impact on labour market developments pre- and post-EU membership, and develops scenarios into the future. This chapter also includes an analysis of the impact of demographic developments on a likely ‘labour shortage’ scenario for the catching-up processes of Central and Eastern European countries into the future.
Michael Landesmann, Hermine Vidovic

Institutional Channel

Frontmatter

Chapter 9. Corruption, Institutions and Convergence

Empirical Analysis of Public Tenders of the Old and New EU Member States
Abstract
This chapter focuses on the measurement of institutional convergence in the new EU member states and four Southern European EU member countries. Previous studies have used perception data or expert surveys at the country level to quantify institutional convergence. We present a new method which is based on hard micro-level data. Our approach focuses on control of corruption risks in public procurement in European countries. We use a contract-level dataset from 2006 to 2018 with more than 3.6 million observations downloaded from the European Union TED database. We consider control of corruption risks as a proxy for or aspect of institutional quality, and the countries with high institutional quality (high ability to control corruption) as a benchmark to measure differences in test country performance. Our results partially support earlier research on the poor performance of Southern European EU countries and show the considerable differences in institutional convergence between the new EU member states. Slovakia, Estonia and Lithuania have achieved strong institutional convergence and by now have reached high institutional quality in control of corruption risks. Meanwhile, Poland has attained some convergence, but its institutional quality still remains relatively weak. Latvia has shown a certain stability in this regard. Other countries like Hungary, the Czech Republic and Romania have had a low level of convergence starting with weak initial institutional quality. Thus, they now have institutions with a weak or moderate ability to control corruption risks. Slovenia and Bulgaria have displayed the weakest performance, with divergence from the benchmark countries. These findings show that institutional reforms at the national level matter and that EU policies promoting these measures are necessary but not sufficient conditions for successful institutional convergence.
István János Tóth, Miklós Hajdu

Chapter 10. Climate Change and EU Membership: The Journey of Central and Eastern Europe Towards a Carbon-Free World

Abstract
This chapter looks into the impact of EU membership on the carbon intensity of EU11 economies since joining the EU. EU membership boosted foreign trade and FDI, leading to a rapid re-industrialization of EU11 and making them the fastest converging group of upper-middle-income countries in the world. Nevertheless, EU11 economies maintained their previously established trend decline in carbon intensity. The convergence path of EU11 was unique among converging upper-middle-income countries in this regard. In other parts of the world, convergence was coupled with increasing carbon intensity.
The role of EU membership in bringing about this unique trend is well identifiable. On the legal-institutional side, the adoption of the acquis and EU institutions, the environmental norms and the shared decision to reduce CO2 emission (to achieve the EU goals for 2020) required also EU11 countries to contribute. The EU not only set requirements, it also provided significant financial support through several channels to EU11 to help achieve these targets and to mitigate the social consequences of the measures involved.
István P. Székely

Chapter 11. The Impact of the EU on National Fiscal Governance Systems

Abstract
National fiscal frameworks (NFFs) represent a set of domestic arrangements to enhance the predictability and transparency of public finances. This chapter looks into a specific aspect of institutional convergence: the development of NFFs in the EU-11 countries following their EU accession. The turning point for the region was the emergence of supranational provisions in the context of the economic governance reforms between 2011 and 2013. These set in motion a comprehensive revamp of EU-11 NFFs, covering, most notably, the design of domestic numerical rules, medium-term budgetary frameworks and the set-up of national independent fiscal institutions (IFIs). This process has led to a broadly similar state of advancement compared to the ‘old’ Member States as corroborated by the various indices of the Commission’s Fiscal Governance Database. This chapter devotes special attention to EU-11 IFIs by discussing the observable patterns of their six main functions. It concludes that IFIs’ watchdog role has generally strengthened the public scrutiny over fiscal policy-making, partly reflecting the spread of good practices across the EU during the institution-building phase. Nonetheless, further efforts could be made so that fiscal councils would be able to play an even stronger role in budgetary planning and oversight.
László Jankovics, Leire Ormaetxea Igarzabal, Ştefan Ciobanu

Chapter 12. Towards Sustainable and Adequate Pension Systems: Old-Age Pension Reforms After Economic Transition and EU Accession in Central-Eastern and South-Eastern Europe

Abstract
Countries in Central, Eastern and South-Eastern Europe (CESE) face the challenge of becoming “demographically old before being economically rich”. Ensuring the long-term stability and adequacy of pension systems was one of the most important tasks that these countries faced following economic transition. The pension systems struggled with reduced societal trust as well as many weaknesses, including a lack of targeting, weak administration as well as adverse incentives. This chapter discusses the phases of evolution of pension systems in CESE countries in the context of international convergence. The first one is the period of retrenchment of the pension systems during the market-driven economic changes. The second phase is the multi-pillar reforms with privatisation, towards a liberal market orientation. The third phase is rebalancing of pension systems that followed EU accession leading to convergence with the EU policies. It also outlines the main challenges ahead of the pension systems in the CESE countries.
Agnieszka Chłoń-Domińczak

Backmatter

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