Robert Holzmann
Governor
Oesterreichische Nationalbank
Welcome remarks
Vienna, November 5, 2020
CESEE in the COVID-19 crisis - the role of the EU and
global spillovers
Opening remarks at the Conference on European Economic Integration (CEEI)
2020
Ladies and Gentlemen,
Welcome to this year's Conference on European Economic Integration.
Before we get started, I would like to invite you to join me in a moment of silence to remember
the victims of this week's horrific terrorist attack in Vienna. We would like to extend our deepest
sympathy to the families and friends of the victims and express our solidarity with everyone shaken
by Monday's events.
(Silence)
As we face yet another challenge, I have to say that I am proud that - all of us together - have
already successfully managed the challenge of making this event happen - despite dire
circumstances. So, please allow me to once again welcome you to this year's Conference on
European Economic Integration, the first fully virtual conference in the longstanding tradition of
this OeNB conference series.
Let me particularly welcome
• Professor Marcel Fratzscher, President of the German Institute for Economic Research
(DIW Berlin) and Professor Adam Tooze from Columbia University;
• as well as my central bank colleagues
•
Senior Vice President Linda Goldberg from the Federal Reserve Bank of New York;
•
Governor Anita Angelovska Bezhoska from the Republic of North Macedonia;
•
Deputy Governor Leonardo Badea from Romania;
•
Governor Madis Müller from Estonia;
• Governor Boris Vujčić from Croatia.
2020 marks the year with the deepest recession in the Central, Eastern and Southeastern European
(CESEE) region since the transformation recession almost three decades ago. According to the
latest IMF outlook, real GDP in the three CESEE subregions, the EU Member States, the Western
Balkans and Russia, will decline by around 5% in 2020. The more gradual spread of the pandemic
in Eastern Europe in spring 2020 and the swift response by local authorities prevented a major
spike in infection numbers similar to that seen in many Southern and Western European countries.
This enabled the CESEE region to start lifting restrictions on public life and the economy at a
comparatively early stage. As a result, the IMF expects a smaller contraction in the region than in
the euro area. In its projections for six CESEE EU Member States, the OeNB expects a downturn
similar to that forecast by the IMF for 2020, but a more protracted recovery in 2021 and 2022.
This forecast is subject to substantial downside risks stemming from the uncertainty concerning
the further spread of coronavirus.
Unique features: a health crisis truly global in scope
The current crisis has two unique features that distinguish it from all preceding crises of the past
decades: it started off as a health crisis, but has immediately morphed into an economic crisis, and
it seems to be unprecedented in terms of its global coverage, simultaneity and economic severity.
Let me first elaborate on the first distinguishing feature: The stringent containment measures in
response to the health crisis set the ground for a major economic downturn.
The current surge in infection numbers, especially in many countries of the CESEE region, does
not bode well for a change in the crisis response in the near future: We may see more stringent
containment measures over the winter, as has already been witnessed in the Czech Republic and
Slovakia. Thus, the substantial downside risks are, in part, already materializing. This will
aggravate the economic burden.
Let me now move on to the second distinguishing feature: The crisis is truly global in nature.
Hence, we are confronted with a simultaneous shock to both domestic and external demand. In
addition, an unprecedented degree of uncertainty is weighing negatively on consumption and
investment. As a result, especially small, open and strongly integrated economies - like the
CESEE countries - are highly vulnerable in economic terms.
Before relating these two features to the topic of this year's conference, let me briefly review the
most recent economic developments in the CESEE region.
Largest recession since the early 1990s
In the second quarter of 2020, several CESEE countries reported the largest quarterly decline in
economic activity since the early years of transition in the 1990s. Despite the depth of the GDP
decline in the second quarter of 2020, the CESEE region still reported more benign real GDP
decline figures than the euro area (-7.3% compared to -11.8%, quarter on quarter).
The summer months allowed for a breather; however, the swift economic recovery is likely to be
short-lived. This is, at least, indicated by the most recent readings of activity as well as sentiment
indicators. Against the background of rapidly rising infection numbers, improvements in these
indicators have stalled in the past few weeks (Schreiner et al., 2020).
Economic policy has come to the rescue
The CESEE countries deployed rather large fiscal packages, including i.a. tax cuts, wage subsidies
and short-time working schemes. At their maximum usage, such schemes covered, for example,
up to 15% of the workforce in Slovenia and Slovakia, up to 20% in Romania and about one-third
in Croatia. Of course, the size of fiscal packages varied according to the fiscal space available.
Monetary policy reacted as well. In several countries quantitative easing via outright government
bond purchases emerged as an important pillar of monetary policy. Moreover, macroprudential
measures were adopted that cushioned the impact of the crisis on both banks and borrowers. The
CESEE countries also introduced moratoria which played an important role in administering -
metaphorically speaking - first aid. Since the moratoria only provided temporary relief, they have
since been extended and better targeted.
However, it was not only domestic policies that came to the rescue, but also international
cooperation and liquidity support which were negotiated in a timely manner by international
financial institutions, such as the IMF and the EBRD, as well as with the ECB. Regarding the latter,
let me draw your attention to the liquidity arrangements between the ECB and the CESEE
countries, including bilateral swap and repo lines and the newly established precautionary
backstop facility EUREP. As a case in point, the ECB agreed on new swap lines with Bulgaria and
Croatia in spring and early summer, and on new repo lines with Albania, Hungary, North
Macedonia, Romania and Serbia. This support helped stabilize international capital flows for these
countries.
The global nature of the crisis impacts on CESEE via GVCs and policy spillovers
After this brief review of the most recent economic developments in the CESEE region, let me
come back to the second distinguishing feature of the current crisis - its global nature. This brings
me directly to this year's CEEI which addresses the topic of "CESEE in the COVID-19 crisis - the
role of the EU and global spillovers."
In this context, I would like to focus on three issues: i) the role of global value chains (GVCs); ii)
the role of monetary policy spillovers; and iii) the role of EU funds.
1. The role of GVCs
First, the CESEE countries are among the countries with the highest degree of economic
integration through trade, foreign direct investment (FDI) and financial linkages. Together with
Germany, many of the CESEE economies form the backbone of European manufacturing with a
strong focus on the following industries: transport equipment, electronic equipment, metallurgy,
machinery and chemicals.
This central role within globally important value chains has often been considered as a stabilizing
factor for two reasons: i) FDI is an important determinant of production integration, and ii) trade
relations in GVCs are rather stable. As it is difficult to find the right producer for highly specialized
and tailor-made solutions that have to be delivered just in time in specific value chains, trade
relationships in GVCs imply large sunk costs when they are established. This also means that in
case of external shocks, the volume of trade will adjust in a flexible manner but the trade
relationships within the value chains will be maintained. This dominance of adjustment on the
intensive margin of trade rather than on the extensive margin supports stability. Furthermore,
GVC integration often implies external funding through FDI; in other words, GVCs rely on a
rather stable form of external funding.
Yet, in the current global crisis, supply disruptions occurred at the beginning of the crisis.
Meanwhile, major problems result from weak global demand for final goods, which poses
challenges for the deeply integrated CESEE economies.
2. The role of monetary policy spillovers
Second, the ECB's monetary policy response to the pandemic has renewed our interest in
monetary policy spillovers and whether they are beneficial to the spillover-receiving countries.
While US monetary policy is the main driver of a global financial cycle, CESEE countries seem to
be strongly affected by monetary spillovers from the euro area, as the CESEE region is strongly
integrated with the euro area through both trade and financial flows, particularly cross-border
bank flows.
We will discuss this issue extensively in session 1 and panel 1 today, so let me just briefly mention
that empirical evidence points to strong spillovers.
OeNB research shows that monetary easing in the euro area has positive effects on output, but
also on consumer and equity prices in the CESEE region (Feldkircher and Schuberth, 2020). This
is in line with most empirical studies on this topic (Colabella, 2020; Horváth and Voslářová, 2017;
Potjagailo, 2017). In some cases, they even report an amplification of the effects through
secondround effects (Feldkircher, 2015; Feldkircher and Schuberth, 2020) by positively influencing the
output of trading partners as well. Some authors also find that output spillovers are relatively
stronger than price spillovers when compared to the relative strength of output versus price effects
in the euro area itself (Benecká et al., 2018; Moder, 2019). These effects are transmitted through
different channels: via demand, exchange rates and financial linkages (Feldkircher et al., 2020).
A thorough understanding of such spillover effects is thus crucial for the design of appropriate
domestic monetary, and also macroprudential, policies which should ideally allow economies to
reap the benefits of strong economic and financial integration with the euro area, while mitigating
the associated risks. I am looking forward to discussing these issues with my esteemed colleagues
later on in panel 1.
3. The role of EU funds
Third, let me turn to the role of EU funds. As an immediate response, EU authorities provided
emergency support financing and eased certain requirements, such as national co-financing
requirements, to tap available cohesion and structural funds from this year's EU budget. In
parallel, flexibility clauses in the fiscal framework were activated and state aid rules temporarily
adjusted.
As a next step, the European Parliament and the Council agreed on the EUR 100 billion SURE
instrument proposed by the European Commission. SURE stands for "support to mitigate
unemployment risks in an emergency." Based on EU budget capital market borrowing, the SURE
instrument will provide loans to individual Member States to support short-time work schemes
and help Member States protect jobs and thus employees and self-employed against the risk of
unemployment. The first bond issuance for this program was substantially oversubscribed and can
be considered a success.
The Council has already approved financial support under SURE to several Member States.
Romania, for example, will receive EUR 4 billion, and Poland will receive EUR 11 billion.
Pursuant to the invitation by the European Council and with a view to supporting a common
broad-based recovery within the EU, the European Commission complemented its previous
budgetary proposals for the next multiannual financial framework (MFF) for the period from 2021
to 2027 with a "recovery package" at the end of May. According to the Council, the funds under
this European Union recovery instrument referred to as "Next Generation EU" (NGEU) are
designed to be committed over the period from 2021 to 2023 and to be paid out until end-2026.
The negotiations between the European Parliament and the Council Presidency on the European
Union recovery instrument have been ongoing since the end of August, in parallel to the
negotiations on the proposals for the MFF which were already tabled back in 2018. As usual,
nothing is agreed until everything is agreed - but I am convinced that both sides of the negotiation
table are well aware of their great responsibility in the current situation.
At barely 1% of EU gross national income (GNI), the EU budget is tiny. Therefore, national
sovereign borrowing will continue to bear the brunt of the fiscal deficit financing in all EU
Member States.
Still, the simultaneous investment stimulus provided by the EU recovery funds in the coming years
is expected to be substantial and highly welcome. Even more so, as EU countries of below-average
per capita income, i.e. the CESEE EU Member States in particular, will be among the largest
beneficiaries.
Let me now zoom in on the Recovery and Resilience Facility (RFF), the largest program under
the European Union recovery instrument. The RFF particularly aims at fostering cohesion and
upward convergence by improving resilience and growth potential as well as by supporting the
green and digital transitions. In order to receive support from the RFF, EU Member States have
to submit national recovery and resilience plans. Each plan will have to dedicate a minimum of
37% of expenditure to climate-related (green) investment and a minimum of 20% of expenditure
to digital investment (on both infrastructure and capacities).
While these targets are clearly set, there may be somewhat more conditionality needed to reach
the goals stated earlier, especially with respect to supporting the green transition. I will come back
to this in my conclusions.
Did the crisis change our way of thinking?
It is too early to judge whether the COVID-19 crisis will have a lasting impact on economic
policymaking. Yet, the crisis has certainly put a spotlight on the powerful effects that economic
policy can have. The direct macroeconomic support observed during the past six months has been
impressive.
Let me elaborate on one issue in this context, which will be addressed tomorrow in more detail:
the view on globalization and the attitude toward global value chains. The COVID-19 crisis led to
a marked increase in the demand for specific goods, e.g. health products and IT equipment. These
goods are produced in highly organized global value chains. Yet, at the same time, the crisis also
led to interruptions in these supply chains due to restrictions in transport and labor mobility. This
situation has been exacerbated by export bans and quantity restrictions. World Trade
Organization (WTO) estimates suggest that around 20% of global exports of protective clothing
and 17% of disinfectant exports were affected.
In light of these examples, does the crisis call for a different view on global value chains? The
COVID-19 crisis may not be a "game changer" in this respect, but it will reinforce a trend that has
been observed for quite some time. The expansion of global value chains has been slowing since
the mid-2000s, and this trend has been intensified by the global financial crisis.
So far, however, we cannot speak of a shortening or even dismantling of global value chains. After
all, the rather swift revival of global value chains following the easing of restrictions has
demonstrated their stability and their potential for supporting the recovery. Certainly, the current
crisis holds some lessons: to promote not only efficient, but also robust and resilient global value
chains in the future. For example, the build-up of safety stocks for essential goods could provide
for sufficient buffers even though it requires a careful balancing of benefits and costs. Upstream
bottlenecks should be identified and avoided by broadening the supplier base. Governments can
support the smooth functioning of global value chains by facilitating the smooth flow of goods and
services and by supporting substitutability of inputs through harmonizing norms and standards.
In lieu of conclusions: most imminent reform priorities
Let me end by drawing your attention to the most pressing priorities. In the near term - and
depending on the further spread of the pandemic - the main challenge will be to use the policy
space in an efficient way to mitigate the economic impact of the health crisis against the need of
implementing indispensable health policy containment measures. This can be done by making use
of monetary, fiscal and macroprudential policies that put quality over quantity. At the same time,
the sizeable structural challenges faced by our economies should be tackled as well.
In this context, I would like to mention two reform priorities: the digital transformation and the
green transformation.
With respect to the digital transformation, the current crisis has possibly acted as a catalyst. This
is, inter alia, evidenced by the simple fact that we are meeting virtually for the first time in the
CEEI's history.
In the context of global value chains, a focus should be put on digitalization. Policy can support
the information and communication technology (ICT) intensity of global value chains and thus
make them more resilient to future shocks. Regulatory frameworks for innovation, digitalization
and cross-border capital flows are key to enable a sound business environment and support not
only economic recovery but also productivity growth in the long run. The strategic and
forwardlooking positioning of EU firms in regional and global production networks can be supported by
policies linked to capital market development and by a digital single market.
Another eminent issue is the green transformation.
The move toward a green economy implies a wide range of decisions that have to be taken. For
example, the question of carbon emission pricing and respective taxation - both domestically and
in the form of a border adjustment mechanism - must be addressed. Measures to avoid or deal
with stranded assets must be considered. Moreover, in addition to promoting green technologies,
we will certainly need regulation to limit or eliminate brown technologies. The latter are still
prevalent in the transportation sector, where we need to reduce individual motorized travel to a
large extent.
In this regard, let me end my remarks by briefly commenting on the European railway system:
With 26% of the global network of railways, Europe exhibits the second largest railway
infrastructure based on operating length after the Americas (accounting for 37%).
As an aside, the predecessor of the current dominant carrier in Austria, the OeBB, was the K.K.
Staatsbahnen of the Austro-Hungarian Empire. The K.K. Staatsbahnen were the result of an
emergency nationalization in 1884 following an economic crisis ten years earlier. Many private
carriers of the then new technology were in economic difficulties and the takeover by the state
implied a shift in the policy paradigm. Already 150 years ago, a crisis acted as a catalyst.
Yet, the European railway network is far from being seamless. Given the huge technical and
structural heterogeneity that prevails in the European railway network, we need strong and
coordinated policy support to leap from a 19th century heritage to a Single European Railway Area
that is fit for the 21st century.
Such efforts should focus on significant investment in intelligent railway infrastructure to
overcome the differences in gauges, signaling and voltage systems and to ensure interoperability
and connectivity throughout Europe. Moreover, we need investment in the safety and reliability
of railway systems to allow for autonomous monitoring and smart maintenance without causing
disruptions. A truly integrated European railway system that would allow for a cargo container to
be sent from the South of Italy to the North of Sweden, or from Finland to Portugal, within 24
hours, not within a week. It would also allow for most of the cargo trucks to operate within a
50 km radius of home, not within a 500 km or 1,000 km radius. Thus, we need more investment
to optimize the modal split in transportation. In this context, let me mention that the EU budget
with its Connecting Europe Facility provides a welcome contribution to tackle this common
challenge for Europe.
I have chosen the European railway system as one example, but I am sure that many more
examples can be found for demonstrating innovative ways to come out of this crisis.
Another important challenge will be the handling of the unavoidable increase in public debt and
its implications for (the conduct of) monetary policy. The ECB's monetary policy has been hugely
supportive, and its effects extend beyond the euro area. I am looking forward to discussing all of
these issues with you today and tomorrow!
To kick-start our discussions, we are pleased to have a highly renowned keynote speaker join us
today. I have the pleasure to welcome and introduce to you Marcel Fratzscher.
Marcel Fratzscher is an economist, author and columnist. He is President of the German Institute
for Economic Research (DIW Berlin) - one of Europe's leading independent economic research
institutes and think tanks - and Professor of Macroeconomics at the Humboldt University of
Berlin. He is also member of the High-level Advisory Board of the United Nations on the
sustainable development goals (SDGs) and engages for the equality of opportunity for
disadvantaged children in various NGOs. His research work focuses on macroeconomics,
inequality and European integration. He has published three books since 2014, has a bi-weekly
column in Zeit Online and regularly writes for the German and international media, including the
Financial Times, Wall Street Journal and Project Syndicate.
As I am looking forward very much to his keynote lecture, let me close here, without any further
ado, by wishing you an interesting, productive and also entertaining conference.
Marcel, the floor is yours.
References
Benecká, S., L. Fadejeva and M. Feldkircher. 2018. Spillovers from Euro Area
Monetary Policy: A Focus on Emerging Europe. Working Papers 4/2018. Latvijas Banka.
Colabella, A. 2020. Do ECB's monetary policies benefit EMEs? A GVAR analysis on the
crisis and post-crisis period. Oxford Bulletin of Economics and Statistics: forthcoming.
Feldkircher, M. 2015. A global macro model for emerging Europe. In: Journal of
Comparative Economics 43(3). 706-726.
Feldkircher, M., T. Gruber and F. Huber. 2020. International effects of a
compression of euro area yield curves. In: Journal of Banking and Finance: forthcoming.
Feldkircher, M. and H. Schuberth. 2020. The transmission of euro area monetary
policy shocks to Eastern Europe: New evidence from high frequency identification. OeNB:
mimeo.
Horváth R and K. Voslářová. 2017. International spillovers of ECB's unconventional
monetary policy: the effect on Central Europe. In: Applied Economics 49(24).
2352- 2364.
IMF. 2020. A Long and Difficult Ascent. World Economic Outlook. October 2020.
Moder, I. 2019. Spillovers from the ECB's non-standard monetary policy measures on
Southeastern Europe. In: International Journal of Central Banking 15(4). 127-163.
Potjagailo, G. 2017. Spillover effects from euro area monetary policy across Europe: A
factor-augmented VAR approach. In: Journal of International Money and Finance 72.
127- 147.
Schreiner, J. et al. 2020. Developments in selected CESEE countries: Coronavirus sends
CESEE region into a deep recession. In: Focus on European Economic Integration Q4/20:
forthcoming.