European Forum Alpbach: Speech of Mr. Igor Lukšić, PhD, Deputy Prime Minister and Minister of Finance of Montenegro at Financial market Symposium

European Forum Alpbach, Financial market Symposium, September 2-4, 2010
Financial Markets and the Real Economy


Speech of Mr. Igor Lukšić, PhD, Deputy Prime Minister and Minister of Finance of Montenegro
"Economic Future of Central and Eastern Europe"


Ladies and Gentlemen,

It gives me a great honor to be here with you today as a panelist at Alpbach Forum. At the same time, allow me to express my satisfaction for having an opportunity to exchange views and have constructive discussion of the actual topics.

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 labour. 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 oferring 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.

There are various forecasts for the coming years and the question is if there is an optimal combination of economic policies reducing the crisis effects to the minimum. The financial crisis has clearly shown how important it is for any country, not only for CEE countries to embark on policies aimed at sustainable growth paths. Once the crisis is over, a return to sustainable policies in CEE countries is essential for the further convergence process. Achieving sustainable convergence can be seen as an important anchor. It is also an opportunity for the CEE economies to adopt economic policies that will eventually lead to the successful adoption of the euro. Therefore, there is the need for sound economic policies and the need for pursuing regulatory reform agenda. If countries of CEE want to regain competitiveness in today’s world and to recover slowed down segments of economy further structural reforms are needed. The task for governments is to help brake the wall of uncertainties as well as to help the economy bear the social costs of adjustment without any particular intervention in the economy apart from structural reforms.

It is certain that regardless of the state programs and fiscal and monetary stimulus programs the CEE countries should find a way of stimulating demand in Western Europe, which represents upwards of 80 percents of thier exports. The earlier start of fiscal consolidation in CEE and in general much lower level of public debt give CEE countries more room to keep a positive outlook for strong growth in the coming years and long-term macro-economic stability. The Central-Eastern European countries have been beneficiaries of large capital inflows, but risk perceptions are not going to revert to pre-crisis level. It is the most likely that one of the most important outcomes of the current crisis will be that transition and catching-up economies have to adjust to more difficult financing conditions, not only from domestic institutions but also from the international and European community. It is difficult to predict how long higher risk perceptions are going to last. Therefore, the whole set of policies – technology policy, human resource development policy, industrial and regional policy should be employed in order to strengthen the tradable sector and to some extent compensate for a reduced inflow of FDI in CEE economies. At the same time, there is no other formula but to join further FDI to ever improved business environment.

Ladies and Gentlemen

Reforms take time and although significant progress can be noted there is still a long way to go. This task, which is not going to be an easy one, will have to take place in an environment of changed external and internal conditions. The expected long-term impact of the crisis on potential growth paths is not only relevant for the CEE Region, but also for the main export markets of the countries of Western Europe. This in turn will be a growth-dampening factor for CEE countries. For this region, as for the SEE Region stands that formula of reach countries should not be copied because such countries have luxury to postpone certain painful steps such as implementation of social policies. As catching-up economies CEE countries have to ‘run’ faster. This Region has strong growth potential and such potential should and, I firmly believe, will be used. In the meantime it may also contribute to the process of systemic economic global harmonization.

Thank you for your attention.