Speech of the Deputy Prime Minister and Finance Minister, Mr. Igor Lukšić PhD., on the European Forum Alpbach, on the panel Economic future of the CEE

“…Recent evidence shows that transformation and outstanding achievements in the Central and Eastern Europe occurred in less than two decades. Two distinct transitions occurred within the short period of time - from a centrally-planned to market economy structures and the increased economic advantages brought by the wave of globalization. All CEE economies, including my country Montenegro, experienced high growth before the crisis. Membership to the EU and NATO or prospects of it contributed a lot to such economic growth in the Smithian sense of the market expansion and division of labor. EU membership has shaped major aspects of economic policy and new legislation. Also, in terms of globalization, international financial integration has been a central aspect of the growth strategy. That integration has contributed to constant inflows of capital, including not only foreign direct investment but also bank lending flows. FDI inflow, economic freedom, progress of structural reforms and aid inflow are in strong correlation with GDP growth rate in these countries. As large number of empirical studies show high foreign capital inflows play a vital role in CEE economies and it is an indicator of the advancing globalization process in this Region. These countries have improved the business environment and introduced the policy measures aimed at liberalizing, promoting and protecting FDIs offering relatively low wages, low corporate taxes etc. The global economy was facing a worldwide financial crisis in 2008. During the global economic and financial crisis the CEE economies are being subjected to a severe test, although at varying degrees across countries. The crisis interrupted the stability of the catching-up processes in the economies of Central and Eastern Europe. However, according to some analysis it is not evident that the CEE economies as a group will ultimately be affected more than other regions. Economic and financial crisis has imposed an obligation to reconsider and adjust policies to extreme circumstances and global economy trends. Within the CEE and elsewhere, this was a challenge, but also some kind of Government’s maturity and accountability test to verify long lastingness and sustainability of economic policies. In the years preceding the crisis most CEE countries were growing rapidly. Such growth was perhaps in any case not sustainable. The cutback of external capital has ensured a more rapid decrease than many had expected and there is a clear need for rebalancing of the growth model. The strongest impact of the crisis affected Baltic countries with a severe pull back in their growth rates. To dampen the effect of the crisis and correct external imbalances, national authorities have adopted and put into place a number of policy measures. These measures differed across countries, depending on the room for maneuvers to adopt supportive monetary and fiscal policies. Also, the international and European community provided substantial financial support to some CEE countries. What is important to stress is that CEE’s investors did not flee when financial turbulence hit the region. Negative crisis implications will significantly downgrade the efforts and economic results achieved by many countries, including CEE. The continuity of the constant growth related to the improvement of economic systems and subsequent realization of macroeconomic scenarios will be affected. At the same time, the possibility of fulfilling appropriate criteria established with the objective of providing conditions for the achievement of the macroeconomic stability and adequate functioning of the economic system will be under question. Here, example of an EU country could be mentioned. Entry into the euro area allowed to economy of that country to attract foreign capital and grow rapidly. But a failure to strengthen internal sources of productivity abruptly changed the dynamic. From large current account deficit and high growth, that country went to continued large external deficits and low growth. It suggests that the euro as a currency leaves no room to improvise, but to face the burning issues in one economy…”