Speech by Executive Vice-President Dombrovskis at the ECB conference on central, eastern and south-eastern European countries
Good morning, ladies and gentlemen
Let me start by thanking the European Central Bank for the invitation to speak at this conference on central, eastern and south-eastern European countries.
I regret that I cannot be with you in person today.
We are now well into the second year of Russia’s brutal war against Ukraine. There appears to be little sign of the Kremlin pausing its relentless and illegal campaign.
When this aggression started in February 2022, EU Member States were only just emerging from the COVID-19 pandemic.
Back then, we were embarking on a solid recovery path.
Russia’s war changed all that.
It has disrupted supply chains and led to an economic slowdown. It has threatened global food and energy security. It stoked inflation to record highs – and, for many people, triggered a cost-of-living crisis.
I know that CESEE countries were hit particularly hard by this.
Since they relied heavily on Russian fossil fuels, the sharp rises in energy and food prices led to greater losses in people’s purchasing power and higher consumer price inflation.
Subsequent rises in interest rates have made debt servicing and capital more expensive. All this has come at a time when there are massive investment needs to strengthen a green and digital economy, and to protect our resilience and security.
These needs are even more evident in CESEE countries.
Russia’s war has forced the European Union, along with the democratic world, to deal with dramatically altered international circumstances.
Economic challenges and fragmentation risks are increasing. This is also true of global trade flows.
As CESEE countries are generally open economies, often with strong ties with Russia, this development is particularly relevant.
This brings me to some short-term challenges that they face.
The first is to control inflation.
Since spending on food and energy makes up a higher share of the consumer basket than in the rest of the EU, CESEE countries felt a greater initial price shock.
Inflation expectations may also adjust faster where there have been previous, and not so distant, periods of very high inflation.
Second: governments in these countries may have had to provide substantial fiscal support to compensate for the impact of high energy prices on people’s purchasing power.
But this was often done in a not very targeted way. It has amplified the impact on public debt and reduced incentives to lower energy demand and decouple from fossil fuels.
With energy prices back to pre-war levels, this needs correction. Fiscal policy needs to become clearly restrictive, also to help bring down inflation.
Third: in several of the region’s countries, we see a risk of macroeconomic imbalances emerging.
They result from a negative interplay between high inflation – also driven by domestic factors such as wage and profits dynamics – cost competitiveness losses, and a deterioration of external sustainability.
This requires a coherent mix of restrictive fiscal and monetary policies, as well as structural policies to improve the functioning of labour, goods and services markets.
Despite these policy challenges, overall, Europe has been able to adjust quickly. We have shown our resilience by acting together: within the EU and with our neighbourhood and global partners.
Regarding the EU economy, the outlook is better than we could have hoped for a year ago. That said, risks are still on the downside and the latest data provide a mixed picture.
For this year and next, we expect to see moderate growth and a gradual decline in inflation. A strong labour market, record-low unemployment and a significant fall from the energy price highs of last autumn should provide continued support.
We see a broadly consistent picture for CESEE countries as well.
In addition to these short-term issues, there is an urgent need to tackle our significant structural challenges:
- the green and digital transitions;
- our dependence on very few sources for a range of critical and strategic inputs for our economy – energy, for example, but also rare earths and minerals; and
- more broadly, strengthening our competitiveness.
For the next few years, we can also rely on the Recovery and Resilience Facility – the RRF – to help EU Member States become more sustainable, prepare them for new challenges and shore up their ability to withstand future shocks.
Provided that Member States properly carry out the reforms and investments set out in their national Recovery and Resilience Plans, the RRF should have a positive impact on all EU economies and societies well beyond its 2026 cut-off date.
What is important now is to press ahead with putting all the reforms and investments into effect to make sure that RRF funds are fully absorbed. And EU Member States are doing this: we see a steady flow of RRF funding, even though with different speeds in terms of implementation.
Disbursements now stand at more than €153 billion.
In terms of additional economic growth, and net of spill-over effects, the RRF’s estimated impact is 43% higher in CESEE countries than in other EU countries.
This also creates a significant positive spill-over for non-CESEE Member States, which in turn strengthens the EU’s single market.
The RRF contributes around €104 billion to make the CESEE countries more resilient, more sustainable, and better prepared for the challenges and opportunities of the green and digital transitions. So far €14 billion has been disbursed.
In May 2022, the RRF was given a key role to play in the REPowerEU plan: the EU’s response to the socio-economic hardships and global energy market disruptions caused by Russia’s war against Ukraine.
REPowerEU is particularly important for CESEE countries. Several have carbon-intensive energy systems and a historic high dependence on Russian energy supplies.
The high ambitions of CESEE countries are already reflected in the climate and environmental contributions in their plans.
On average, these are ten percent higher than for other Member States. The ongoing process to revise national plans and include REPowerEU chapters is an opportunity to deepen this dimension.
In short: the RRF is a highly agile instrument. It is a unique chance to invest in the future: to strengthen competitiveness, social and economic convergence, and growth.
Moving to climate neutrality and embracing the digital age go hand in hand with strengthening Europe’s competitiveness.
To stay competitive, we are pursuing the concept of open strategic autonomy: combining international leadership and engagement with measures to strengthen the single market.
However, as we benefit from an open economy, we must also preserve our economic security.
This means building on our strengths, maintaining and growing partnerships around the world, while addressing identified risks in a targeted and proportionate way.
Our strategy on economic security is based on three pillars: promoting, protecting, and partnering.
- promoting the EU’s competitiveness;
- protecting our economic security using a range of existing tools, also considering new ones; and
- partnering with the broadest possible range of reliable partners to strengthen economic security.
In a world that has become more contested and geopolitical, we must work together to ensure Europe’s sovereignty, security and prosperity in the years to come.
Ladies and gentlemen
Let me conclude with some observations about the geopolitical and economic importance of the CESEE region.
For the EU, it has been strategically important for several decades.
This importance has only increased with the recent tectonic changes in the EU’s geopolitical and geoeconomic situation.
It has become more urgent than ever to stand up for European values and interests, and to support our partners in building more politically and economically stable societies.
The EU has a strategic interest in having peaceful and prosperous neighbours. We can only be secure and thrive if our neighbours do so.
Russia’s war of aggression has had the effect of bringing the EU and its neighbouring countries closer together. This is also thanks to prompt support provided by the EU, for example:
- fully integrating the Western Balkans into the EU food security initiatives;
- providing €1 billion support to address their energy needs; and
- raising budget support for the Eastern Partnership and also Macro-Financial Assistance – €145 million in MFA for Moldova this year and €18 billion in MFA+ for Ukraine.
For the EU’s longer-term support for Ukraine, as you know, the Commission has proposed the new Ukraine Facility, which is worth up to €50 billion in grants and loans.
It aims to provide stable, predictable support up to 2027 for Ukraine’s macro-financial stability, long-term reconstruction and reforms needed for its path towards EU accession.
I would also like to mention the vital role that central banks play to ensure price stability and overall healthy and stable economies in our partner countries.
A good example is the regional project that the European System of Central Banks is implementing, with EU support, to strengthen central bank capacities in the Western Balkans.
It brings together 20 EU Member State central banks, the ECB and six central banks from the Western Balkans.
I see many new economic opportunities, for both sides.
The potential is clear: in 2022, the Eastern Partnership region was the EU’s 11th trading partner. The EU is the first trading partner for countries such as Ukraine, Georgia and Moldova. In the Western Balkans, the EU is the main investor, donor and trade partner.
Let us remember too that the CESEE region is converging. Eventually, it will form a much larger part of the EU.
Raising income levels for those EU Member States located in this region up to the average of the rest of the EU could add more than 10 percent to our collective GDP.
One way to strengthen the EU’s economic potential is to speed up this convergence process and make it more sustainable.
We can do this by:
- promoting policy dialogue on structural reforms;
- deepening our trade links; and
- boosting investments via Economic and Investment plans, in Western Balkans and Eastern Partnership countries.
Ladies and gentlemen
I hope I have given you a flavour of how the central, eastern and south-eastern European countries fit into the challenging context that Europe faces today – along with the high value and importance that we attach to our friends and neighbours in this region. Thank you.
