World Bank EU8 Quarterly Economic Report

1
World Bank EU8 Quarterly Economic Report

• April 2005
• Special Topic Labor Taxation and Employment in
  EU8

2
Highlights of the Report

• EU8 macroeconomic prospects for 2005 broadly
  favorable despite political instability and
  weaker external environment.
• Revision of SGP both good and bad news for EU8.
• Renewed reform momentum needed to sustain high
  growth rates and boost employment.
• Lower labor taxes can help, but offsetting
  measures needed to protect fiscal positions.

3
Macroeconomic Prospects

• Growth rates likely to slow across region in 2005
  because of weaker activity in main export
  markets, real appreciation of currencies, and
  political uncertainty ahead of elections in
  several countries.
• Stellar export performance in 2004 may be hard to
  repeatand large external imbalances remain in
  some countries.
• EU-accession related inflation pressures
  successfully contained in Visegrad countries, but
  problems in the Baltics (not least Latvia).
• Fiscal outcomes in 2004 mostly better than
  expected, but further consolidation in 2005-06
  elusive.

4
Revision of SGP

• Acceptance of pension reform costs (although only
  for 5 years at a declining rate) good news for
  Poland, Hungary, and Slovakia.
• If countries stick to Convergence Programs from
  late 2004, they could meet Maastricht criteria in
  2007 and adopt Euro in 2009.
• But risk that general weakening of Pact will
  reduce its credibility, including in EU8.

5
Renewed Reform Momentum Needed

• Political instability has slowed reform momentum
  across the region.
• Key priorities include social spending reforms,
  enhancing labor market flexibility, boosting
  competition in network sectors, and strengthening
  public administration (including to make good use
  of EU funds).
• Better now than to wait for growth to slow.

6
Lower Labor Taxes Can Help

• Labor taxes, not least on low-income earners, are
  high in the EU8, even in a broader European
  perspective.
• High labor taxes on low-income earners appear to
  be more damaging than in EU15.
• Lower labor taxes can help support employment and
  output growth.
• But need to ensure fiscal neutrality. Best to cut
  spending, and safest to do this first.

7
In SumOr in Other Words

• Short-term macro-prospects broadly favorable, but
  more needed to address internal or external
  imbalances.
• Fiscal policies need to play a larger role to
  support macro-adjustment and sustain good growth
  performance.
• Broader reforms also need to be accelerated,
  including enhancing labor market flexibility.
• Lower labor taxes can play an important role,
  also to support higher employment, but need to
  first (or at the same time) find off-setting
  measures.