The Vienna Institute for International Economic Studies (Wiener Institut für Internationale Wirtschaftsvergleiche/WIIW) published a gloomy summer forecast for Eastern Europe and warns of spreading mass unemployment, notably among young people.

According to the latest analysis of WIIW, the Eastern European EU Member States performed worse than their neighbouring countries. EU integration is therefore increasingly called into question. The situation in Eastern European labour markets is assuming disastrous dimensions. In Eastern Europe a whole generation faces serious risks of joblessness, and mass unemployment among young people threatens to become a permanent phenomenon. No signs of a trend reversal can be spotted.

Dramatic situation in the labour market

The WIIW analysts describe the situation in Eastern European labour markets as generally dramatic but with significant differences between countries within the direct sphere of influence of the EU/euro-zone and those east of it. While the unemployment rate in Kazakhstan is only 5.2 per cent, it reaches up to 30 per cent in the (South) Eastern countries of the EU. The record of officially registered unemployed persons is held by Macedonia (31 per cent). Mass unemployment among young people is particularly dramatic. In Bosnia and Macedonia more than 60 per cent of all young people are jobless, in Serbia more than 50, in Slovakia, Estonia, Latvia and Lithuania more than 30 per cent, in Hungary and Poland 28 per cent. In its study the WIIW came to the conclusion that a whole generation in Eastern Europe was doomed to unemployment. Young people predominantly held part-time or temporary jobs even in countries with better employment opportunities. In Slovenia for example 75 per cent of the young labour force had only temporary jobs.

Causes and consequences

The experts of the Vienna Institute for International Economic Studies also explained the causes and consequences of this development. The euro-zone was still undergoing a recession, which had harmful effects on Eastern Europe. Young people were jobless, and consequently development had come to a standstill. Eastern Europe’s economic recovery was slowing down and adversely affected by the strong dependence on ailing “core EU” markets as well as high international prices for energy, food and metals, informed the WIIW.

Squeezing Eastern Europe’s economy to death?

Assessing tight austerity policies in Eastern Europe very critically, the WIIW analysts were convinced that economic recovery was nipped in the bud. They described a viscous circle that obviously could not be broken. But the experts also presented the example of some states in the east which did not pursue austerity policies and continued to report high growth rates. WIIW director Peter Havlik: “In the discussion about growth and austerity, almost all states decide in favour of austerity”. According to him, the countries would hardly succeed in overcoming the crisis if they did not try to pull themselves out of the crisis through investment. Investments and private consumption were, however, declining everywhere. The WIIW analysts regarded this as a clear sign of a misguided economic policy.

Controlled deficit spending

The WIIW experts therefore call for a shift in EU policy from stringent austerity targets to “controlled deficit spending”, i.e. to boost demand and consumption through increased government spending. But such a policy would also have to taken into account banks and their bad debt. The WIIW has identified “medium-term risks and challenges”. According to the recent analysis, the basic scenario is that the EU remains indecisive, economic growth for 2012 will be disappointedly low, further policy adjustments are imminent. 1st risk: recession in the euro-zone will deepen in 2013, austerity – and all its adverse effects – will continue. 2nd risk: the EU (euro-zone) will break apart. The opportunities perceived by the WIIW: the EU reconsiders and changes its economic policy, austerity (strict cost-cutting policy) will be reduced or ended.

Minus growth

The WIIW forecasts significantly declining growth rates of the gross domestic product (GDP) in 2012, especially for Slovenia and Croatia (both minus 1.5  per cent), Hungary and Serbia (both minus 1 per cent) as well as Bosnia (minus 0.5 per cent) and the Czech Republic (minus 0.3 per cent). The South Eastern European countries are, however, expected to continue growing: Bulgaria +0.5 per cent, Romania and Montenegro: +1 per cent, Macedonia: +1.9 per cent. For the year 2013 the WIIW analysts predict a GDP plus in all the above-mentioned Eastern European countries (between 0.5 per cent in Slovakia and up to 3 per cent in Macedonia).

Eurasia is booming

Based on the economic outlook of the WIIW, the EU will report a shrinking GDP (minus 0.3 per cent) in 2012 due to undergoing economic stagnation. In contrast, the EU neighbours in the east and in Eurasia (Russia, Ukraine, Turkey, Kazakhstan) would continue to post significant growth rates ranging between 3.2 and 3.8 per cent, Kazakhstan would probably grow by six per cent. The WIIW pointed out that these countries did not pursue any strict austerity policies. The Baltic states also reported positive growth rates. A recovery with growth rates of 2.2 per cent and 3 per cent in 2012 and 2013, respectively, has been forecast only for one neighbouring country of Austria, namely Slovakia.