The region faces deep economic scars. “We compared our current projections with our projections for the region before the pandemic,” said IMF Managing Director Kristalina Georgieva. At a conference Held in Dubrovnik. We find that real GDP levels will be 3.5% lower in 2024 than we expected in early 2020. It’s like someone took 50 billion euros out of people’s pockets in those five years, he added.
Kristalina GeorgievaPhoto: Olivier DOULIERY / AFP / Profimedia
Here’s what else the head of the IMF said:
- It’s great to be back in Dubrovnik, a city I’ve admired since before its Game of Thrones fame. Our conference is ideally located here, providing shelter from the storm waters.
- Ever since this conference was held in 2019, the world has indeed been in turbulent waters. As we all know, we were hit with shock after shock, after shock: Covid. Russia’s war in Ukraine. Cost of living crisis.
- These recent shocks – especially the war – were severe in the Central, Eastern and Southeastern Europe region. For Ukraine, the war has been absolutely devastating for both people’s lives and the economy. In other parts of the region, it has fueled an unprecedented gas crisis and food price inflation, particularly affecting the most vulnerable.
- The war also accelerated geo-economic fragmentation. Post-Cold War peace dividends are fading as defense budgets rise. European and global supply chains had to adapt to new realities.
- What does all this mean for the region’s economy? Persistently high inflation and weak growth. Core inflation has eased since the end of 2022, but is still painfully high, and core inflation shows no clear signs of abating yet.
- The region will continue to face stormy weather with a weak recovery, stagnant inflation and high uncertainty. But this is a flexible area. Indeed, we can learn from Dubrovnik’s history how to overcome today’s challenges.
- Dubrovnik was later called Ragusa – it was ahead of its time in many ways. For example, the government provided services for the poor and orphans and invested heavily in education. And Ragusa prospered. Let’s try to reframe how history applies to the three biggest challenges facing your region today.
- The first is to reduce inflation, support the recovery and lay the foundation for future growth. This requires the coordination of monetary and fiscal policies. On the monetary side, countries with independent central banks should maintain a tight stance and tighten monetary policy further if inflation is high.
- From a financial point of view, let’s be prudent, as Ragusa did, but at the same time protect the vulnerable. Integration should be more ambitious than currently planned. While this will require tough choices, it will have the triple benefit of reducing inflation, lowering debt servicing costs and strengthening financial stability.
- Investing in people also requires structural reforms. That’s easy to say, hard to do in a period of fiscal consolidation. But measures such as workforce restructuring and child care subsidies are needed to expand the workforce and address labor shortages that stifle growth in the region. Integration of Ukrainian refugees will also help. While supporting their return to Ukraine is vital, it may take a long time for many of them.
- Poland and Estonia have created online tools to help Ukrainians find jobs faster than previous refugee groups. The Czech Republic addresses the underemployment of refugees by recognizing their professional qualifications.
- A second challenge facing the region is energy security. Although energy was not included in the main resources of the time, Ragusa can still inspire us. To ensure vital water supply, the city constructed a 12 kilometer aqueduct. Huge public investment!
- Securing energy today requires critical infrastructure connections. A good example is the Baltic Cohesion project connecting Estonia, Latvia and Lithuania to the EU electricity grid.
- A third challenge is how to take advantage of emerging opportunities in a fragmented world. Ragusa skillfully navigated “fragmentation” for centuries, maintaining open trade with empires to the east, west and north in an ever-changing geo-political environment. Today, fragmentation creates both risks and opportunities for the region. One risk is that some multinationals will prefer – or be discouraged – from keeping production at home. This would make it difficult to develop economies in the region by inserting them into the supply chains of these companies – as the Czech Republic, Slovak Republic or Slovenia did in the past. And some factories are likely to be relocated closer to home from Asia.
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