Magdalena Redo* AN ANALYSIS OF ECONOMIC CHANGES IN THE COUNTRIES OF CENTRAL AND EASTERN EUROPE** BELONGING TO THE EUROPEAN UNION IN THE YEARS 2003-2014 Abstract: Economic changes in  the  Eastern bloc countries which currently belong to  the  European Union can be characterized as  incredibly strong and important. In  the  process of  catching up with the general development, some problems have been reduced. Unfortunately, other issues are starting to increase. The main aim of the present review is to show changes of the period 2003-2014 in major economic areas of these countries and also to point out potential sources of economic issues in the fu- ture. Keywords: Central and Eastern Europe; European Union; integration process; economic changes. 1. INTRODUCTION It has been a  quarter of  a century since the  fall of  communism and start of  state trans- formation in  the  post-socialist European countries which underwent enormous changes and became an  integral part of  the  European economy. Eleven countries of  Central and Eastern Europe, which once were behind the Iron Curtain, are now (2015) European Union member states. The Czech Republic, Estonia, Lithuania, Latvia, Poland, Slovakia, Slovenia Torun International Studies 2015, No. 1 (8), pp. 83-97 DOI: http://dx.doi.org/10.12775/TIS.2015.008 * Nicolaus Copernicus University in Toruń, e-mail: dynus@umk.pl ** When using the concept of countries of the Eastern-Central Europe belonging to the European Union I mean Bulgaria, Croatia, the Czech Republic, Estonia, Lithuania, Latvia, Poland, Romania, Slovakia, Slovenia and Hungary. http://dx.doi.org/10.12775/TIS.2015.008 84 Magdalena Redo and Hungary entered the EU 1st May, 2004; Bulgaria and Romania 1st January, 2007, and Croatia 1st of July, 2013. Most of the listed countries have been a  European Union member states. What is  more, five of  those countries entered the  eurozone. Slovenia was the  first to  introduce Euro (1st January, 2007), then followed Slovakia (1st January, 2009), Estonia (1st January, 2011), Latvia (1st January, 20014) and Lithuania (1st January, 2015). It is worth noting that the  last three countries decided on  entering the  eurozone immediately after the economic crisis of 2008 (Cieślik et al. 2015, pp. 123-162). The aim of the present review is to compare major economic indicators of these coun- tries as well as the statistics within the EU; it is also expected to point out economic changes that occurred in these countries after the EU’s extension to the East in 2004 and potential sources of economic troubles in the future. The analysis is based merely on Eurostat data and refers to the period of 2003-2014. 2. ANALYSIS OF CHANGES OF SELECTED ECONOMIC INDICATORS IN CENTRAL AND EASTERN EUROPEAN COUNTRIES BELONGING TO THE EUROPEAN UNION IN THE YEARS 2003-2014 As it  is commonly known countries of  Central and Eastern Europe are characterized by a  significantly lower level of  prosperity when compared with the  ‘Old 15’. Since the  dif- ficult transformation period in  the  90’s, these countries made great progress in  approach- ing Western economies. In the  years 2003-2013, the  highest GDP per capita in  relation to  the  EU average was recorded in  Romania and Lithuania, respectively 77% and 52%. In Latvia, Poland, Estonia, Slovakia and Bulgaria, GDP increased by around 40%. The low- est recorded increase was noted in Hungary, the Czech Republic (for 6%) and Croatia (for 9%); Slovenia recorded a small decrease of 1.2% (fig. 1). 2 As it is commonly known, countries of Central and Eastern Europe are characterized by a significantly lower level of prosperity when compared with the 'Old 15'. Since the difficult transformation period in the 90's, these countries made great progress in approaching Western economies. In the years 2003-2013, the highest GDP per capita in relation to the EU average was shown in Romania and Lithuania, respectively 77% and 52%. In Latvia, Poland, Estonia, Slovakia and Bulgaria, GDP increased for around 40%. The lowest increase was noted in Hungary, the Czech Republic (for 6%) and Croatia (for 9%); Slovenia noted a small decrease of 1.2 % (fig. 1). Fig. 1. The comparison of GDP in countries of Central and Eastern Europe belonging to the EU in the years 2003 and 2013 (the percentage of the EU average on the left axis), and the change of the statistics in the period 2003-2013 (in %, on the right axis) Source: self-reported data on the basis of Eurostat, 2015b. Despite that, the differences still prevail as significant. It must be remembered that only after a few years of the Central and Eastern countries having entered the EU and gotten access to the shared market, the strong economic crisis appeared. The crisis significantly influenced the process of catching up. Looking from a broader perspective of time, it is noted that some Central and Eastern European economies have shown a faster rate of development than Western economies (tab. 1). Thus, it can be expected that in the next few decades, the process of catching up will be successfully continued. 107 82 82 75 73 73 67 66 64 61 55 45 -10 10 30 50 70 90 110 130 -10 10 30 50 70 90 110 130 2003 (left axis) 2013 (right axis) change in % (right axis) Fig. 1. The comparison of GDP in the countries of Central and Eastern Europe belonging to the EU in the years 2003 and 2013 (the percentage of the EU average on the left axis), and the change of the statistics in the period 2003-2013 (in%, on the right axis) Source: self-reported data on the basis of Eurostat, 2015b. 85An analysis of economic changes in the countries... Despite that, the  differences still prevail as  significant. It  must be remembered that only after a few years of the Central and Eastern countries having entered the EU and gotten access to the shared market, the strong economic crisis appeared. The crisis significantly in- fluenced the process of catching up. Looking from a broader perspective of time, it is noted that some Central and Eastern European economies have shown a faster rate of development than Western economies (tab. 1). Therefore, it can be expected that in the next few decades, the process of catching up will be successfully continued. Tab. 1. The average economic growth level in the Central and Eastern European countries belonging to the EU in selected periods in the years 1997-2014 (annually, in %) 17 years 18 years 6 years 5 years 5 years on average in the years 1997-2014 excluding  2009 1997-2014 1997-2002 2003-2007 2010-2014 EU 281 2,1 1,6 2,6 2,5 0,9 Estonia 6,2 4,6 7,1 8,4 3,8 Latvia 6,1 4,6 6,3 9,8 2,7 Lithuania 6,0 4,5 5,4 8,7 3,5 Slovakia 4,4 3,7 3,0 7,2 2,6 Poland 4,3 3,9 3,9 5,1 3,1 Romania2 4,2 3,3 2,9 6,6 1,4 Bulgaria 3,6 2,9 2,5 6,3 1,2 Hungary 3,3 2,5 4,6 3,5 1,2 Slovenia 3,3 2,5 4,1 4,8 0,2 Czech Republic 2,6 2,1 1,3 5,5 1,0 Croatia3 1,9 1,1 b/d 4,8 -1,1 1 data from the period 1997-2002 refers to 27 countries of the EU (excluding Croatia) 2 Romania – data since 1999 3 Croatia – data since 2003 Source: own calculations on the basis of Eurostat, 2015i. In the last 18 years (1997-2014), among analyzed countries, the fastest development was seen in the Baltic countries. Excluding the economic crisis of 2009, Baltic countries had two decades of average economic growth of 6%, which is three times higher than the EU average (tab.  1). In comparison with the  majority of  Western economies, the  difference in the pace of economic development is even greater as significantly higher statistics of eco- nomic growth in new EU countries increase the EU average. The economic growth in  the  Central and Eastern European countries belonging to the EU in the period 2000-2007 amounted annually to the average of 5.8%. Not only did it provide a significant growth of income, but it also contributed to creation of new work 86 Magdalena Redo places; this was essential in the face of restructurization and fall of many state-based compa- nies in transforming economies. Especially at the beginning of the 21st century, the major- ity of these countries had a double-digit unemployment rate, whereas in Poland, Slovakia, Bulgaria and Lithuania – the rate amounted to almost 20% (fig. 2). 4 *data from 2008 shows a selected month in 2008, in which a given country had the lowest unemployment rate. Source: self-reported data on the basis of Eurostat, 2015m. Improvement of the situation in the following years enabled the countries to limit the difficulties and achieve a similar unemployment rate as 'Old 15'. In 2008, the unemployment rate in Estonia, Slovenia, Czech Republic, Bulgaria, Romania and Lithuania decreased to only 4-5%, in Poland and Latvia up to 6%, in Croatia, Hungary and Slovakia – 7.5-9%, whereas the average in the EU amounted to 7%; this means that in 8 of the selected countries, the unemployment rate was lower than the average rate in the entire EU (Eurostat, 2015). The unemployment rate increased due to the crisis, but still, at the end of 2014, 6 out of 11 Central and Eastern European countries had lower unemployment rate than the average of the EU (fig. 2). It must be remembered that, although, the faster economic growth means more work places, increase of wealth, prospective development, stability and credibility, better conditions of maintaining foreign policy, it also means dangers of higher inflation (as a result of lower competition and the growth of debt), dependency and deterioration of credit capacity. All of that may contribute to the decrease of development possibilities or higher instability due to strong influence of the foreign capital. It is especially dangerous for the Eastern bloc economies which, for a long time, were far from Western tendencies and free access to western financial markets. Thanks to that (or because of that – these countries' debt is increasing and they become more and more dependent on Western capitals; they become a victim of globalization and dynamic development of international financial markets), these countries have lower debt and lower prices. While aiming at reducing the gap and becoming economic partners, the Central and Eastern economies forget about the risk (or they do not appreciate the risk) of fast and dynamic economic changes; the significantly lower stability and credibility place them in a different category. As a result, these countries do not possess Western economic indicators (for example, within the debt) – it may not be significant in the times of prosperity, but becomes painfully executed in the times of worse economic situation or the risk growth. Indeed the price level in Central and Eastern countries is significantly lower than in Western economies. In most cases, it oscillated on the level of 70% of the average price level in the EU. However, the Bulgarian prices oscillate on 49% of the European average. The level of prices in Poland and Romania is slightly higher – respectively 56% and 54% of the EU average (fig. 3). Fig. 3. Comparative price levels of final consumption in the Central and Eastern European countries belonging to the EU in 2013 (in %, EU 28=100) 17,3 13,2 11,6 11,4 10,8 10,7 10,2 9,7 9,0 7,7 7,4 6,8 6,1 0 4 8 12 16 20 2001 2008 2014 * data from 2008 shows a selected month in 2008, in which a given country had the lowest unemployment rate. Fig. 2. Unemployment rate in  the  Central and Eastern European countries belonging to the EU in 2001, 2008* and 2014 (in%) Source: self-reported data on the basis of Eurostat, 2015m. The improvement of the situation in the following years enabled the countries to limit the difficulties and achieve a similar unemployment rate as ‘Old 15’. In 2008, the unemploy- ment rate in Estonia, Slovenia, Czech Republic, Bulgaria, Romania and Lithuania decreased to  only 4-5%, in  Poland and Latvia went up to  6%, in  Croatia, Hungary and Slovakia  – 7.5-9%, whereas the  average in  the  EU amounted to  7%; this means that in  8 of  the  se- lected countries, the unemployment rate was lower than the average rate in the entire EU (Eurostat, 2015). The  unemployment rate increased due to  the  crisis, but still, at the  end of 2014, 6 out of 11 Central and Eastern European countries had lower unemployment rate than the average of the EU (fig. 2). It must be remembered that, although the faster economic growth means more work places, increase of wealth, prospective development, stability and credibility, better condi- tions of  maintaining foreign policy, it  also means dangers of  higher inflation (as a  result of lower competition and the growth of debt), dependency and deterioration of credit ca- pacity. All of  that may contribute to  the  decrease of  development possibilities or higher instability due to  the strong influence of  the  foreign capital. It  is  especially dangerous for the Eastern bloc economies which, for a long time, were far from Western tendencies and free access to western financial markets. Thanks to that (or because of that – these countries’ debt is  increasing and they become more and more dependent on  Western capitals; they become a victim of globalization and dynamic development of international financial mar- kets), these countries have lower debt and lower prices. While aiming at reducing the gap and becoming economic partners, the Central and Eastern economies forget about the risk (or they do not appreciate the risk) of fast and dynamic economic changes; the significantly lower stability and credibility place them in a different category. As a result, these countries 87An analysis of economic changes in the countries... do not possess Western economic indicators (for example, within the debt) – it may not be significant in the times of prosperity, but becomes painfully executed in the times of worse economic situation or the risk growth. Indeed the  price level in  Central and Eastern countries is  significantly lower than in Western economies. In most cases, it oscillated on the level of 70% of the average price level in the EU. However, the Bulgarian prices oscillate on 49% of the European average. The level of prices in Poland and Romania is slightly higher – respectively 56% and 54% of the EU average (fig. 3). 5 Source: self-reported data on the basis of Eurostat, 2015a. It must be remembered, that the current EU average (28) is significantly lower than the EU average (15) before the Eastern enlargement. The group of poorer Central and Eastern countries greatly lowered the EU average in price levels. That is why, the level of prices in these countries is even more different from the price levels in Western countries. It is important mainly because disproportion in prices is vanishing in time; although such disproportion will never disappear fully, the process of 'leveling prices' in the EU will be in progress, especially in the case of products which are easy and cheap to transport. Before extending the EU to the East, leveling was about lowering some prices in the most expensive countries and increasing them in poorer countries, as the process was about adjusting to the price level in the richer part of the previous 'Old 15'. Currently, adjusting prices does and will take place mainly in Central and Eastern countries; as a result, the income will be lowered as well as competition of these economies (the higher the prices and salaries, the higher the fall of competition). Thus, the conclusion is simple. Prices in Poland and neighboring countries will be rising faster than in Western Europe as long as they are not adjusted to the EU average and, continuing, to the Western prices. What is more important, the process does and will happen in all EU countries, no matter if the countries are or are not in the eurozone. This phenomenon does not have any connection with introducing euro – contrary to the popular belief shared by common people and politicians who are skeptical towards economic reforms. Indeed, introducing euro may slightly accelerate the price convergence, especially because of the rounding effect; however, statistics show that the scope of this phenomenon has so far been small. The process of fading of disproportion in prices is a result of creating a shared market; the process would appear also without the eurozone. This is a natural phenomenon in the times of globalization, observed all around the world. It must be noted, that the process of converging prices in the Central and Eastern countries increases the pace of economic growth. That is why inflation is much higher in countries which have the fastest development and in the periods of the highest economic growth – data found in tab. 1 and tab. 2. Currently (May 2015), due to post-crisis issues in a lot of Western Europe countries and economic stagnation in the majority of the 'Old 15', inflation is low also in the rest of EU countries (there are even instances of deflation) – tab. 2. Tab. 2. Inflation rate (HICP) Annual average rate of change in the Central and Eastern European countries belonging to the EU in selected periods in the years 2003-2014 (annually, in %) on average in the years 2008 on average in the years 2014 49 54 56 60 64 68 69 69 71 78 83 0 20 40 60 80 100 Fig. 3. Comparative price levels of final consumption in the Central and Eastern European countries belonging to the EU in 2013 (in%, EU 28=100) Source: self-reported data on the basis of Eurostat, 2015a. It must be remembered that the  current EU average (28) is  significantly lower than the  EU average (15) before the  Eastern enlargement. The  group of  poorer Central and Eastern countries greatly lowered the  EU average in  price levels. That is  why, the  level of prices in these countries is even more different from the price levels in Western countries. It is important mainly because disproportion in prices is vanishing in time; although such disproportion will never disappear fully, the  process of  ‘leveling prices’ in  the  EU will be in progress, especially in the case of products which are easy and cheap to transport. Before extending the EU to the East, leveling was about lowering some prices in the most expen- sive countries and increasing them in poorer countries, as the process was about adjusting to the price level in the richer part of the previous ‘Old 15’. Currently, adjusting prices does and will take place mainly in  Central and Eastern countries; as  a  result, the  income will be lowered as  well as  competition of  these economies (the higher the  prices and salaries, the  higher the  fall of  competition). Thus, the  conclusion is  simple. Prices in  Poland and neighboring countries will be rising faster than in Western Europe as long as they are not adjusted to the EU average and, continuing, to the Western prices. What is more important, the process does and will happen in all EU countries, no matter if the countries are or are not in the eurozone. This phenomenon does not have any connection with introducing euro – contrary to the popular belief shared by common people and politicians who are skeptical towards economic reforms. Indeed, introducing euro may slightly accelerate the price con- vergence, especially because of the rounding effect; however, statistics show that the scope of this phenomenon has so far been small. The process of fading of disproportion in prices 88 Magdalena Redo is a result of creating a shared market; the process would appear also without the eurozone. This is a natural phenomenon in the times of globalization, observed all around the world. It must be noted, that the  process of  converging prices in  the  Central and Eastern countries increases the  pace of  economic growth. That is  why inflation is  much higher in countries which have the fastest development and in the periods of the highest economic growth – data found in tab. 1 and tab. 2. Currently (May 2015), due to post-crisis issues in a lot of Western Europe countries and economic stagnation in  the  majority of  the  ‘Old 15’, inflation is  low also in  the  rest of EU countries (there are even instances of deflation) – tab. 2. Tab. 2. Inflation rate (HICP) Annual average rate of  change in  the  Central and Eastern European countries belonging to the EU in selected periods in the years 2003-2014 (annually, in %) on average in the years 2003-2008 2008 on average in the years 2009-2014 2014 eurozone (19) 2,4 3,3 1,5 0,4 Czech Republic 2,6 6,3 1,5 0,4 Latvia 8,0 15,3 1,6 0,7 Bulgaria 6,9 12,0 1,7 -1,6 Slovenia 4,0 5,5 1,7 0,4 Slovakia 4,8 3,9 1,8 -0,1 Croatia 3,2 5,8 1,9 0,2 Lithuania 3,9 11,1 2,4 0,2 Poland 2,4 4,2 2,5 0,1 Estonia 5,0 10,6 2,7 0,5 Hungary 5,5 6,0 3,3 0,0 Romania 9,3 7,9 4,3 1,4 Source: own calculations on the basis of Eurostat, 2015f. Before the  crisis, when the  economic situation around the  world was much better, inflation in a lot of Central and Eastern countries significantly exceeded the inflation level on the West. In the period 2003-2008 in Bulgaria, Latvia and Romania it reached on aver- age 7-9% annually, and in  the  majority of  analyzed countries it  maintained a  level twice as  high as  the  inflation in  eurozone (2.4%)  – tab.  2. Exceptionally high double-digit in- flation appeared during the period of prosperity overheat in the middle of 2008 in Baltic states – it reached at the time almost 12% in Estonia, 13% in Lithuania and 18% in Latvia (Eurostat, 2015). Central and Eastern European countries entered the market economy with relatively low public debt. Strangely, this is one of the few advantages of the previous political system. 89An analysis of economic changes in the countries... Unfortunately, 25-years of  fiscal expansion in  some countries and the  2008 crisis greatly affected public financial state of  some of  them and, as  a  result, these countries, reached a  similar level of  public debt as  Western countries. The  public debt of  Croatia at the  end of  2014 amounted to  85% of  GDP, which practically is  the average of  the  EU. Slovenia and Hungary have a slightly lower debt of 80.9% and 76.9% of GDP respectively – fig. 4. Although in other countries the debt is lower, in the majority of them it amounts to 40-50% of GDP; such result, in the case of countries of lower credibility, is not a good result after all. Slightly lower debt can be found in Bulgaria (27.6% of GDP) and Estonia, which has the lowest public debt among all EU countries – 10.6% of GDP. 6 2003-2008 2009-2014 eurozone (19) 2,4 3,3 1,5 0,4 Czech Republic 2,6 6,3 1,5 0,4 Latvia 8,0 15,3 1,6 0,7 Bulgaria 6,9 12,0 1,7 -1,6 Slovenia 4,0 5,5 1,7 0,4 Slovakia 4,8 3,9 1,8 -0,1 Croatia 3,2 5,8 1,9 0,2 Lithuania 3,9 11,1 2,4 0,2 Poland 2,4 4,2 2,5 0,1 Estonia 5,0 10,6 2,7 0,5 Hungary 5,5 6,0 3,3 0,0 Romania 9,3 7,9 4,3 1,4 Source: own calculations on the basis of Eurostat, 2015f. Before the crisis, when the economic situation around the world was much better, inflation in a lot of Central and Eastern countries significantly exceeded the inflation level on the West. In the period 2003-2008 in Bulgaria, Latvia and Romania it reached on average 7-9 % annually, and in the majority of analyzed countries it maintained a level twice as high as the inflation in eurozone (2.4%) – tab. 2. Exceptionally high double-digit inflation appeared during the period of prosperity overheat in the middle of 2008 in Baltic states – it reached at the time almost 12% in Estonia, 13% in Lithuania and 18% in Latvia (Eurostat, 2015). Central and Eastern European countries entered the market economy with relatively low public debt. Strangely, this is one of the few advantages of the previous political system. Unfortunately, 25-years of fiscal expansion in some countries and the 2008 crisis greatly affected public financial state of some of them and, as a result, these countries, reached a similar level of public debt as Western countries. The public debt of Croatia at the end of 2014 amounted to 85% of GDP, which practically is the average of the EU. Slovenia and Hungary have a slightly lower debt of 80.9% and 76.9% of GDP respectively – fig. 4. Although in other countries the debt is lower, in the majority of them it amounts to 40-50% of GDP; such result, in the case of countries of lower credibility, is not a good result after all. Slightly lower debt can be found in Bulgaria (27.6% of GDP) and Estonia, which has the lowest public debt among all EU countries – 10.6% of GDP. Fig. 4. The comparison of public debt in countries of Central and Eastern Europe belonging to the EU in 2004, 2007 and 2014 (in % of GDP) 86,8 85,0 80,9 76,9 53,6 50,1 42,6 40,9 40,0 39,8 27,6 10,6 0 10 20 30 40 50 60 70 80 90 2004 2007 2014 Fig. 4. The comparison of public debt in countries of Central and Eastern Europe belon- ging to the EU in 2c004, 2007 and 2014 (in% of GDP) Source: self-reported data on the basis of Eurostat, 2015d. It must be noted that the public debt of the majority of these countries has increased to the present state only recently as a result of the crisis in 2008 (fig. 4). The highest growth in  the  last 7 years (2007-2014) was recorded in  Latvia (almost four times), Slovenia (2.5 times), Romania and Estonia (2 times), Latvia and Croatia (1.5 times). In Poland, although the public debt has been kept on a relatively stable level, 153 billions of PLN taken from OFE (Polish open pension funds) greatly helped in  lowering the  debt at the  end of  2014. Moreover, Poland and Hungary had the  highest public debt just before the  crisis among the countries in the region. Furthermore often high deficit of the public finance sector does not allow for reduction of  the  debt  – although it  is successfully realized in  other coun- tries, thanks to fiscal discipline, consolidation of public finances and fast pace of economic growth. Estonia and Bulgaria are among these countries. In the last 12 years, Estonia had surplus in  public finance for 8 years  – on  average on  the level of  1.5% of  GDP. None of the remaining 9 Central and Eastern countries had surplus for the last 12 years (Eurostat, 2015). And although the  average in  such extreme economic conditions does not reflect the issue, it is worth examining closely the strength of the expansion characterizing the fiscal policy in the majority of the Central and Eastern countries in the last 12 years (fig. 5). 90 Magdalena Redo 7 Source: self-reported data on the basis of Eurostat, 2015d. It must be noted that the public debt of the majority of these countries has increased to the present state only recently, as a result of the crisis in 2008 (fig. 4). The highest growth in the last 7 years (2007-2014) was noted in Latvia (almost four times), Slovenia (2.5 times), Romania and Estonia (2 times), Latvia and Croatia (1.5 times). In Poland, although the public debt has been kept on a relatively stable level, 153 billions of PLN taken from OFE (Polish open pension funds) greatly helped in lowering the debt at the end of 2014. Moreover, Poland and Hungary had the highest public debt just before the crisis among the countries in the region. Continuous, often high deficit of the public finance sector does not allow for reduction of the debt – although it is successfully performed in other countries, thanks to fiscal discipline, consolidation of public finances and fast pace of economic growth. Estonia and Bulgaria are among these countries. In the last 12 years, Estonia had surplus in public finance for 8 years – on average on the level of 1.5% of GDP. Non of the remaining 9 Central and Eastern countries had surplus for the last 12 years (Eurostat, 2015). And although the average in such extreme economic conditions does not reflect the issue, it is worth examining closely the strength of the expansion characterizing the fiscal policy in the majority of the Central and Eastern countries in the last 12 years (fig. 5). Fig. 5. Average deficit level of the public finance sector (general government) in countries of Central and Eastern Europe belonging to the EU in the years 2003-2014* (annually, in % of GDP) *data for Croatia for the period 2011-2014 Source: self-reported data on the basis of Eurostat, 2015c. Apart from Estonia and Bulgaria, with the first mentioned closing the annual budget with surplus of 0.6% of GDP, and with the second closing the budget with a small deficit of 0.6% of GDP annually, all remaining countries had deficit in public finance every year over the last 12 years on the level of 3-4% of GDP (fig. 5). The worst balance in finances of those countries belongs to Croatia (on average on the level of 6% of GDP) and Hungary(5.1% of GDP). The third worst country is Poland – with the annual deficit of 4.6% of GDP. It must be highlighted that this result is significantly worse from, for example, Baltic states which economies encountered worse results of the 2008 crisis (fig. 5). Fiscal over-expansion and exceeding established limits of deficit and public debt are reflected in the EU members' Excessive Deficit Procedure – EDP (Treaty on EU, 2012, article 126, Protocol No 12, 2012), which disciplines governments in their fiscal policy in order to increase their flexibility, hence limit disadvantages of resigning from monetary policy in the currency union. Presently (May, 2015), 11 out of 28 EU member states undergoes the 0,6 -0,6 -2,6 -3,1 -3,2 -3,5 -3,8 -4,2 -4,6 -5,1 -6,0 -7,0 -6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1,0 Fig. 5. Average deficit level of the public finance sector (general government) in countries of Central and Eastern Europe belonging to the EU in the years 2003-2014* (annu- ally, in % of GDP) * data for Croatia for the period 2011-2014 Source: self-reported data on the basis of Eurostat, 2015c. Apart from Estonia and Bulgaria, with the former closing the annual budget with sur- plus of 0.6% of GDP, and with the latter closing the budget with a small deficit of 0.6% of  GDP annually, all remaining countries had deficit in  public finance every year over the last 12 years on the level of 3-4% of GDP (fig. 5). The worst balance in finances of those countries belongs to Croatia (on average on the level of 6% of GDP) and Hungary (5.1% of  GDP). The  third worst country is  Poland  – with the  annual deficit of  4.6% of  GDP. It must be highlighted that this result is significantly worse than, for example, Baltic states which economies encountered worse results of the 2008 crisis (fig. 5). Fiscal over-expansion and exceeding established limits of  deficit and public debt are reflected in  the  EU members’ Excessive Deficit Procedure  – EDP (Treaty on  EU, 2012, article 126, Protocol No 12, 2012), which disciplines governments in  their fiscal policy in order to increase their flexibility, hence limit disadvantages of resigning from monetary policy in the currency union. Presently (May, 2015), 11 out of 28 EU member states un- dergo the excessive deficit procedure, including three countries from the Central and Eastern Europe: Croatia, Poland and Slovenia (apart from them, also Cyprus, France, Greece, Spain, Ireland, Malta, Portugal, Great Britain). It is worth noting that Estonia (and Sweden) be- longs to a very small group of EU countries, which have never had EDP imposed on them (European Commission, 2015). Tab. 3 includes information on  the amount of  imposed EDPs on Central and Eastern European countries and the duration. 91An analysis of economic changes in the countries... Tab. 3. Periods of  imposed EDP in  Central and Eastern European countries (on the  15th of May, 2015) date of issuing EDP date of closing EDP Bulgaria 3.07.2010 22.06.2012 Croatia 21.01.2014 ongoing Czech Republic 5.07.2004 2.12.2009 3.06.2008 20.06.2014 Estonia – – Lithuania 7.07.2009 21.06.2013 Latvia 7.07.2009 21.06.2013 Poland 7.07.2009 ongoing* Romania 7.07.2009 21.06.2013 Slovakia 5.07.2004 2.12.2009 3.06.2008 20.06.2014 Slovenia 2.12.2009 ongoing Hungary 5.07.2004 21.06.2013 * On the 13th of May, 2015 the European Commission issued an official motion to the EU Council to close EDP for Poland Source: self-reported data on the basis of European Commission, 2015b. The size of fiscal expansion is strictly connected with the level of country’s intervention- ism. Four countries with the highest annual deficit of the public financial sector in the last 12 years – Croatia, Hungary, Poland and Slovenia, are in the top five countries of Central and Eastern Europe with the highest influence of the country in its economy, which is mea- sured by the relation of income and expenses to GDP (tab. 4). Lithuania was characterized by the  lowest scale of  influence of  the  public financial system on economy in the last 12 years (2003-2014). Lithuania’s public income amounted to 31.2% of GDP, and public expenses amounted to 34.9% of GDP. In general, the lowest level of public income and public expenses with respect to GDP was found in the countries which, in the past years (especially before the crisis), developed quickly – this includes, apart from Baltic states, also Romania, Bulgaria and Slovakia – data from tab. 1 and 4. In some countries, due to  the  crisis, there was a  significant increase in  public expenses at the  end of  2008 which, with connection of  the  decreased GDP, caused high increase of  expenses with relation to GDP. It was especially visible in Baltic states, where the growth of public expenses went up even to  46% of GDP (which confirms high percentage of standard devia- tion in tab. 4). Although in this case it was a transition phase (for 2-3 years), in Slovenia the phase was more solid (and it still prevails). The change of income in relation to GDP was much lower (lower S(x)) in the analyzed period. In the very critical year of 2009, Estonia greatly increased its relation of  income to  GDP (up to  43.8%) as  it  was known then the data from 2009 would be used for convergence scheduled for 2010  – all of  that to  enter 92 Magdalena Redo the eurozone in 2011. Estonia’s success in consolidating public finances in such critical year deserves recognition. Tab. 4. Total general government revenue and expenditure in Central and Eastern European countries (in% of GDP) general government revenue general government expenditure 2014 on average in the years 2003-14 S(x) 2014 on average in the years 2003-14 S(x) EU (28) 45,2 44,3* 1,5% 48,1 47,9* 3,9% eurozone (19) 46,6 45,1* 2,1% 49,0 48,4* 4,0% Lithuania 34,3 31,2 3,3% 34,9 34,3 11,5% Romania 33,4 33,0 3,1% 34,9 36,5 7,3% Latvia 35,5 34,4 3,9% 36,9 37,1 9,4% Estonia 39,4 38,4 6,1% 38,8 37,8 9,7% Bulgaria 36,4 36,9 6,2% 39,2 37,4 5,0% Slovakia 38,9 36,0 4,3% 41,8 39,8 5,8% Poland 38,6 39,4 3,1% 41,8 44,0 3,0% Czech Republic 40,1 39,4 3,0% 42,0 42,5 5,3% Croatia 42,3 41,7 1,3% 48,0 46,5 3,0% Slovenia 45,0 43,4 2,4% 49,8 47,6 9,6% Hungary 47,6 44,7 4,5% 50,1 49,8 1,8% * in the case of the EU and eurozone it is an average for the period 2006-2014 Source: own calculations on the basis of Eurostat, 2015j; Eurostat, 2015k. It is worth noting that Eastern bloc countries have high level of foreign debt although the period of easy access to foreign sources financing is relatively short. These countries came to the fore when it comes to developing countries which have the highest level of foreign debt in relation to GDP (World Bank, 2015). Romania, the Czech Republic and Poland, although they recorded lowest foreign debt of all the aforementioned countries, reach the ex- ternal debt of around 60% of GDP (tab. 6). In case of other countries, the public debt is significantly higher and oscillates around 80-110% of GDP; in Hungary and Latvia it amounts to 130% of GDP. Taking into con- sideration to relatively high level of foreign debt in those countries, high level of opening these economies, strong dependency on foreign capital and continuous need of foreign capi- tal, the risk of being cut off of external financing sources must be pointed out (in the case of countries which are not in eurozone – 6 out of 11 included countries – where, addition- ally, this issue increases the risk of currency crisis). 93An analysis of economic changes in the countries... Tab. 6. Gross external debt and foreign exchange reserves in Central and Eastern European countries (bn USD and% of GDP, 2014) total reserves (includes gold) gross external debt bn USD % GDP % gross ex- ternal debt bn USD % GDP Hungary 42.0 30.6 23.1 182.0 132.7 Latvia 3.2 10.1 7.9 40.7 127.6 Slovenia 1.0 2.1 1.8 56.2 113.8 Croatia 15.4 27.0 27.2 56.7 99.0 Estonia 0.4 1.7 1.9 22.9 88.6 Bulgaria 20.1 36.1 41.4 48.7 87.3 Slovak Republic 2.6 2.6 3.2 82.3 82.5 Lithuania 8.7 18.1 28.0 31.2 64.8 Poland 100.5 18.3 28.3 354.7 64.7 Czech Republic 54.5 26.5 43.6 125.1 60.9 Romania 43.2 21.7 37.7 114.5 57.5 Source: self-reported data on the basis of The World Bank 2015. Low inflation, returning to economic growth, relative stabilization of public finances in most of the countries in connection with improvement of international financial markets and exceptionally low interest rates have already resulted in the increase of trust for econo- mies of Central and Eastern Europe. All of that also contributed to the flow of capital and the improvement in availability of foreign financing sources, which is expressed in current ratings of these countries (tab. 5). Tab. 5. Ratings for Central and Eastern European countries (May 2015) S&P Fitch Moody’s Bułgaria BB+ BBB- Baa2 Chorwacja BB BB Ba1 Czechy AA- A+ A- Estonia AA- A+ A1 Litwa A- A- Baa1 Łotwa A- A- A3 Polska A- A- A2 Rumunia BBB- BBB- Baa3 94 Magdalena Redo S&P Fitch Moody’s Słowacja A A+ A2 Słowenia A- BBB+ Baa3 Węgry BB+ BB+ Ba1 Source: self-reported data on the basis of CountryEconomy.com, 2015. These effects are most visible in the case of Baltic states, which have their ratings being increased by well-known rating agencies: Standard&Poor’s, Fitch and Moody’s. The above- mentioned is reflected in low and lowering profitability of government bonds of the majority of included countries (fig. 6). 11 *in the case of the EU average – the data is from January, 2015; eurozone – March, 2015 and Lithuania – December, 2014 **due to low public debt in Estonia, its government bonds market is relatively poorly developed; Estonia does not issue obligations with 10-year maturity period, which is the subject of the aforementioned statistics and the Maastricht criteria. Source: self-reported data on the basis of Eurostat, 2015g. Such profitability proves that investors are interested in a given economy; it also proves its trustworthiness and subjective risk. Profitability is significant in terms of a country's availability on foreign financing sources, their cost, creditworthiness ad possibilities of economic development. Profitability of Czech government bonds is worth noting – in April 2015 it amounted only to 0.26% and was the lowest in the EU (fig. 6). It is compared to profitability of the following government bonds: Danish, Finnish, Austrian and Dutch; Czech government bond rates are slightly higher than those from Germany, which are currently characterized with the lowest profitability (0.12%) (Eurostat, 2015). Latvian government bonds are also characterized with very low profitability, especially after taking into consideration recent economic breakdown in the country. These results are significantly better than the average of eurozone and the EU (fig. 6). Relatively low profitability can be found in Slovenia and Slovakia – it oscillates between the averages of eurozone and the EU. Profitability of other countries is significantly higher – 2-3%. From the time perspective, such result may seem attractive – 3 years ago, profitability of 10-year-old Polish government bonds amounted to 5% and previously, in the period 2003-2012, it oscillated at 5-7% (Eurostat, 2015h). However, taking into consideration current exceptionally low interest rates around the world (Poland included),improvement of situation on international financial markets and profitability of government bonds close to zero, profitability of 2.37% seems relatively high. It must be remembered that, unfortunately, it has reflection in the amount of interest rates from obligations which is paid by the Treasury; that means several times higher costs of maintaining Polish public debt than Czech or Latvian debt (profitability of Polish government bonds is ten times higher than Czech and five times higher than Latvian), but also Slovenia or Slovakia (profitability of Polish government bonds is two times higher than those two countries – fig. 6). It all calculates to billions of zloty, as the cost of maintaining public debt in Poland amounted to 34.5 billion zloty in 2014 (in 2012 and 2013 it exceeded 42 billion zloty, mainly due to higher interest rates (Ministerstwo Finansów, 2015; Ministerstwo Finansów, 2014; Ministerstwo Finansów, 2013). Central and Eastern countries, since the moment of changing political state, made enormous progress in economic development, stabilized their economies and proved their credibility in terms of foreign capital. Unfortunately, these countries are still immensely different from Western economies. It will take a few decades for them to achieve similar wealth, stability, credibility and economic structure. More courage, consequence and 3,28 3,25 3,17 2,37 2,36 1,90 1,26 1,18 1,06 0,91 0,42 0,26 0 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 Fig. 6. Long term government bond yields in  Central and Eastern European countries (in%, April 2015*) * in the  case of  the  EU average  – the  data is  from January, 2015; eurozone  – March, 2015 and Lithuania  – December, 2014 ** due to  low public debt in  Estonia, its government bonds market is  relatively poorly developed; Estonia does not issue obligations with 10-year maturity period, which is  the subject of  the  aforementioned statistics and the Maastricht criteria. Source: self-reported data on the basis of Eurostat, 2015g. Such profitability proves that investors are interested in a given economy; it also proves its trustworthiness and subjective risk. Profitability is significant in terms of a country’s avail- ability on foreign financing sources, their cost, creditworthiness and possibilities of econom- ic development. Profitability of Czech government bonds is worth noting – in April 2015 it amounted only to 0.26% and was the lowest in the EU (fig. 6). It is compared to profitabil- ity of the following government bonds: Danish, Finnish, Austrian and Dutch; Czech govern- ment bond rates are slightly higher than those from Germany, which are currently character- ized with the lowest profitability (0.12%) (Eurostat, 2015). Latvian government bonds are also characterized with very low profitability, especially after taking into consideration recent economic breakdown in the country. These results are significantly better than the average Continue tab. 5 95An analysis of economic changes in the countries... of eurozone and the EU (fig. 6). Relatively low profitability can be found in Slovenia and Slovakia – it oscillates between the averages of eurozone and the EU. Profitability of other countries is significantly higher – 2-3%. From the time perspective, such result may seem at- tractive – 3 years ago, profitability of 10-year-old Polish government bonds amounted to 5% and previously, in the period 2003-2012, it oscillated at 5-7% (Eurostat, 2015h). However, taking into consideration current exceptionally low interest rates around the world (Poland included), improvement of  situation on  international financial markets and profitability of government bonds close to zero, profitability of 2.37% seems relatively high. It must be remembered that, unfortunately, it is reflected in the amount of interest rates from obliga- tions which is  paid by the  Treasury; that means several times higher costs of  maintaining Polish public debt than Czech or Latvian debt (profitability of  Polish government bonds is  ten times higher than Czech and five times higher than Latvian), but also Slovenia or Slovakia (profitability of Polish government bonds is two times higher than those two coun- tries – fig. 6). It amounts to billions of zlotys as the cost of maintaining public debt in Poland amounted to  34.5 billion zloty in  2014 (in 2012 and 2013 it  exceeded 42 billion zloty, mainly due to higher interest rates (Ministerstwo Finansów, 2015; Ministerstwo Finansów, 2014; Ministerstwo Finansów, 2013). Central and Eastern countries, since the  moment of  changing political state, made enormous progress in economic development, stabilized their economies and proved their credibility in terms of foreign capital. Unfortunately, these countries are still immensely dif- ferent from Western economies. It will take a few decades for them to achieve similar wealth, stability, credibility and economic structure. More courage, consequence and determina- tion will be required to catch up with the West in this rapidly changing world – the world in which it is becoming more and more difficult for weaker countries with limited finance and investment possibilities, hence limited access to new technologies which generate pros- perity. 3. CONCLUSIONS The past 25 years was a period of enormous economic transformations and successful ap- proaching of the countries of the previous Eastern bloc to Western economies. Even though most of them proved high rate of economic development in the past years, they are still lag- ging behind the West in terms of productivity and prosperity. This fast development helped to decrease the unemployment rate, which was enlarged in the 90’s due to privatization and the collapse of ineffective state-owned businesses. On the other side, dynamic development speeds up the process of price convergence – in the majority of analyzed countries, the prices are still very much different from the EU average; all of that leads to weakened competition, bigger debt, worse creditworthiness, poorer development possibilities. The ongoing oblitera- tion of prices carries risk of increase of salaries with no increase of efficiency in the countries tired of poorer conditions and no real perspective of significant improvement; all of them could lead to lower competition, employment, investment. The previous economic system greatly limited their access to foreign financial sources and delayed the process of debt. Before entering the European Union, public debt of all analyzed countries from the Central and Eastern countries (excluding Hungary) was significantly lower than of the „old 15”. Public debt of these countries, in most cases, is still one of the lowest in the EU despite the high rate 96 Magdalena Redo of debt due to the 2008 crisis. Budget deficits which often appear in the period of prosper- ity, and the increasing scope of public financial system’s influence over the economy may be problematic for the  future economic development. Significantly lower credibility and the lack of stability of entering economies result in lower creditworthiness, which means higher costs of borrowed capital and also limited access to such capital. In critical situation that also causes higher possibility of bankruptcy due to cutting off external financial sources or lim- ited access to such sources. It is crucial because all analyzed countries of Central and Eastern Europe have relatively high foreign debt and are strongly dependent of foreign capital. Only 5 out of 11 countries can count on instant help coming from the European Central Bank thanks to the eurozone membership. 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